Global markets maintained their position near record highs as the week commenced, with investors anticipating significant monetary policy developments. The US Federal Reserve is expected to resume its easing cycle, potentially paving the way for a series of interest rate cuts. Meanwhile, the Bank of Canada is projected to reduce rates by 0.25 percentage points this week, while both the Bank of Japan and the Bank of England are expected to keep their rates steady.
Key Market Movements and Expectations
The MSCI’s all-country index hovered just below last week’s record high, while European stocks saw a modest increase of 0.5 percent. Futures for the S&P 500 and Nasdaq rose by 0.1 to 0.2 percent as traders prepared for the Fed’s upcoming decision. Analysts predict a quarter-point cut from the Fed, which would adjust the funds rate to a range of 4.0-4.25 percent. Futures markets currently reflect only a 4 percent chance of a more aggressive cut of 50 basis points.
Investors are particularly keen to see the Fed members’ “dot plot” projections for future rates and guidance from Fed Chair Jerome Powell regarding the pace of any additional easing. Current futures pricing suggests that the market anticipates 125 basis points of cuts by late 2026, implying that anything less dovish than expected could lead to disappointment.
David Mericle, chief US economist at Goldman Sachs, noted, “The key question for the September FOMC meeting is whether the Committee will signal that this is likely the first in a series of consecutive cuts.” He added that while a softening labor market will likely be acknowledged, the policy guidance may remain unchanged.
Political Influences and Currency Fluctuations
Political factors also play a role in market sentiment. US President Donald Trump criticized the Federal Reserve on Sunday, labeling Powell as incompetent and claiming that the central bank’s actions are negatively impacting the housing market. This political backdrop adds to the uncertainty surrounding the Fed’s policy direction, with some traders preparing for potential volatility leading up to Wednesday’s announcement. According to Kathleen Brooks, research director at XTB, options markets are pricing in a 1 percent swing in either direction, indicating one of the largest expected daily movements in weeks.
In currency markets, the euro remained resilient, rising 0.2 percent to $1.1754 despite Fitch’s recent downgrade of France. The euro traded slightly lower against the pound at 86.4 pence, down 0.1 percent on the day. The currency’s strength is supported by a steady outlook for European rates, as the European Central Bank signaled last week that it is in a “good place” regarding policy.
This week, a series of ECB officials, including President Christine Lagarde, are scheduled to speak, which may further influence market sentiment.
In Asia, the dollar declined 0.2 percent against the yen, trading at 147.39. The Norwegian crown gained ground, reaching multi-month highs against the euro and a 2023 high against the dollar ahead of the Norges Bank policy meeting later this week.
Economic Indicators and Challenges
Discussions between US and Chinese officials regarding their strained trade relationships entered a second day in Madrid. Recent data indicated that the Chinese economy lost momentum in August, with several key activity indicators, including industrial output and retail sales, falling short of forecasts. Investments in property have continued to decline, with home prices dropping an additional 0.3 percent in August, extending a downward trend that has persisted since early 2023.
Lynn Song, chief economist for Greater China at ING, stated, “Given the slowdown of the past few months, we expect that there’s a strong case for additional short-term stimulus efforts.” She anticipates a high likelihood of both a 10 basis point rate cut and a 50 basis point reserve-requirement ratio cut in the coming weeks.
Additionally, China’s market regulator announced on Monday that a preliminary investigation found that Nvidia violated the country’s anti-monopoly law, posing yet another challenge for the US chip giant. Following this news, Nvidia’s shares fell approximately 2 percent in premarket trading.
In commodities, oil prices moderated earlier gains, with Brent crude trading roughly unchanged at $67 a barrel. This stabilization followed a rally prompted by Ukrainian drone attacks on Russian refineries. Meanwhile, gold prices remained steady at $3,640 an ounce, just below last week’s all-time high of $3,673.95.
As the week unfolds, market participants will closely monitor these developments and their potential impact on global financial conditions.
