Overview and dynamics
Since the opening of the trading day on Wednesday, the world's stock indices have been down moderately, while the US dollar has been rising against other major rival currencies. However, the activity of traders and trading volumes are low. Investors avoid large trades before the US labor market data at the end of this week.
On Friday (15:30 GMT +3), major US economic indicators for August will be published, among them - Non-Farm PayRolls, as well as unemployment level data in the US , average hourly wage. Non-Farm PayRolls indicator is expected to increase by 180 000 new jobs. Strong data on the number of jobs will increase the likelihood of an early rate hike.
Over the last five years August data was weaker than the market expected. If it happens again this time, the dollar will lose its positions against other major currencies, and that will support the US stock indices.
The Wall Street Journal dollar index, which tracks the US currency rate against a basket of 16 major currencies, was up by 0.6% to 87.06 on Tuesday, the highest closing level since July 28. According to CME Group, futures on Fed’s interest rates indicate a 27% probability of a rate hike in September (compared with 12% the previous week). The probability of a rate hike in December is estimated at 55%.
At the end of Tuesday, Dow Jones Industrial Average index was down 49 points, or 0,3%, S&P500 - by 0,2%, Nasdaq Composite - by 0.2%. Nasdaq100 Index that includes 100 of the largest US and international non-financial companies lost 0.33% yesterday, and today also has declined significantly since the opening of the trading day.
Expectations that the US Federal Reserve may soon raise interest rates exert a downward pressure on the US stock market.
The US consumer confidence index for August published yesterday, which rose to its highest level since September 2015 (101.1 points against the forecast of 97.0 and July’s 96.7), supported the dollar and increased the pressure on the indices.
At the same time, according to economists, rising US stock market can maintain positive dynamics in case of a moderate and gradual increase in interest rates. Bullish market usually fades during the recession.
As Janet Yellen said at the conference in Jackson Hole, in the longer term, it is believed that "when the central bank decides to raise interest rates, this means that the economy of the country and the companies show very good results."
Moreover, many investors believe that the positive impact of higher interest rates on the US currency will be limited, as the Fed is expected to hold policy tightening at a slower pace than in the past.
Thus, the US stock market has a chance to maintain an upward trend.