Weekly Focus: ECB May Speed Up Market Decline

Last week ended up on the negative note despite the overall positive tune just before the release of the U.S. Labour market report for August, and a stronger than expected Non-Farm Payrolls report that showed 315,000 new jobs were created during August. Even though the number of jobs created turned out to be more than expected the rising unemployment level reached 3.7% for the first time since January 2022.

This small increase in unemployment is not a big deal as the nominal employees’ earnings are rising and are considered to reflect increases in real wages by employees themselves. As this is the case, it could be thought that new jobs will easily be created. However, at some point they may consider the rise of nominal wages as not enough to cover excessive spending that has risen from blistering inflation. If this happens, the unemployment level may rise back to a more common level of 4-5%.

These could also be the considerations of investors  as they welcomed strong labour market data that may push the Federal Reserve (Fed) to pause their hawkish interest rate cycle and therefore push the  stock market up. Eventually the bigger cyclical crisis story could turn things around and place the market in negative territory. In such a situation it would be very unwise to bet on the upside market reversal. On the contrary, this week global financial conditions may worsen amid expected further monetary tightening in Canada and Australia. Fed officials together with their leader Jerome Powell are expected to contribute to the global monetary tightening too this week. The epicenter of this tightening is expected to come into play on Thursday when the European Central Bank (ECB) will make its interest rate decision, followed by Powell’s speech. There are no illusions as to whether monetary policymakers will make enough dovish sounds to support stocks as inflation is still high on both sides of the Atlantic. Stock indexes will be lucky to remain close to the opening levels see at the start of the week on Friday’s close but it is more likely that they will deteriorate. The S&P 500 broad market index technical picture shows an aggressive downside with redeemed primary targets at 3850-3950 points. But the stock benchmark may dive deeper to the extreme secondary targets at 3600-3700 points amid large negative expectations. In case of a further downside in the long term the index may fall to 3000-3100 points.

In the recent four weeks, short positions at 70% of the targeted volume were opened at the average price of 4285-4290 points. The rest of the 30% could be opened once strong reliable downside signals emerge. The final downside target in the long-term is located at 2100-2300 points that could be reached by the end of 2022.

Crude prices are going down aggressively with a primary target at $75-85 per barrel of the Brent crude benchmark, and extreme secondary targets at $50-65 per barrel by the end of 2022. If Brent prices would end September at $100 per barrel, it would be an optimal point to open short positions. It is too risky to open short positions before that as the Organisation of the Petroleum Exporting Countries (OPEC) and its allies may support prices and push them to $105-107. However, the crude market is so political now that such upside movements may create large risks. 

Gold prices are in a downside season and they may last until the end of October. Unfortunately, no second opportunity to open short positions at $1800-1820 per troy ounce was provided. So it would be a tricky game to open positions at around the $1700-1720 support level. A downside target is far below at $1350-1450 per ounce by November. It would be better to open positions of smaller sizse to avoid possible elevated risks.

EURUSD extended its downside targets to 0.95500-0.96500. The key level of this week is 0.98500. If the pair would close this week above this level a recovery would be possible that may eventually transform into an upside formation. The ECB meeting this week would be a primary driver for the pair. There are no good entry points so far.

GBPUSD has redeemed its extreme downside targets at 1.15000-1.16000 and may set more downside targets at 1.14700 and below to the parity in case this target would be passed. There are no good entry points so far. The situation is very complicated.