By Naeem Aslam
As traders and investors pay close attention to the two most important economic events that have unfolded, stock futures in the US and Europe are sitting on solid gains, aiming to finish the week in positive territory.
It’s not overstated to suggest that traders have shifted their perspective on the economic situation, particularly in the US, following the release of economic data, and they are now less concerned about the possibility of a potential recession.
Pretty much everyone understands that the U.S., the world’s biggest and most powerful economy, is heading towards a soft landing. It is likely that this trend will persist for the remainder of the day.
Uncertainty in Asian markets
Asia is sitting on solid gains this week as traders in those markets have also shown confidence, not only on the back of the data print released in the US, but also feel confident that the Bank of Japan is unlikely to react in the way that it did in the past weeks, and that is thinking and acting hawkishly.
Their move created significant uncertainty about the Japanese yen, leading to the worst one-day selloff and pushing the Nikkei index to a level not seen in decades. However, as of Friday, we have seen the index claw back some of those losses, and it is looking to close with some solid gains of 3%.
On Wall Street, the Dow Jones Industrial Average scored over 500 points and posted gains of over 1%, which we also saw in other US stock indices, such as the S&P 500 and the tech heavy index, Nasdaq 100.
Overall, if the US stock indices close in positive territory on Friday as well, it would be the seventh consecutive day with gains of over 3% for the S&P index, which only declined about 8% from its peak during the stock market meltdown a few weeks back.
As for the Tech 100, the Nasdaq 100 is also on track to make gains of over 6%.
What pushed markets higher?
There were two important economic reports that restored confidence among traders and investors this week.
Firstly, the US CPI data confirmed that things are very much on track and the Fed should feel comfortable cutting interest rates as inflation is moving in the desired direction. Connor Woods from HowToTrade.com said that the inflation data has very much confirmed that the Fed should do what is needed, as any prolonged delay in cutting rates could trigger another policy mistake. Remember, the Fed was heavily blamed for a policy mistake when it labelled inflation as a transitory issue, but we now know that it was more than that. If market participants hear more favourable comments with a dovish tone, price action is more likely to move in the positive direction.
Second, the US retail sales data also boosted traders and investors’ confidence. The data confirmed that consumers are in a good place because spending is strong. In addition, the US Weekly Job Loss Claims data, which was derived from the US NFP data, helped to mitigate the risk of the labour market falling behind.
Overall, a number of economic readings confirmed that the economic health conditions are not as dire as many had assumed following the US NFP data, which pushed markets over the edge.
So, is it all beneficial?
It may be challenging to respond affirmatively to that question, as one of the primary risks for the equity markets remains firmly entrenched, and this risk remains constant with each passing weekend.
I am referring to Iran’s retaliation action and the risk of a wide-spread war in the Middle East. So far, Iran hasn’t made any move against Israel, but that doesn’t mean that it will.
Traders should closely monitor developments and maintain a patient approach.
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.
