Review of August 31

S&P500

The US market fell despite strong economic data.

The major US stock indices fell for the third straight day: the Dow Jones lost 1%, the S&P500 sank by 1.1%.

The S&P500 is trading at 3,986, the range is 3,940 - 4,060.

Notably, the new market decline came on strong economic reports.

On Tuesday, the consumer confidence index totaled 103.8. The reading surpassed the forecast of 98, above the previous month estimate.

The jobs report showed a 200,000 increase, exceeding initial forecasts. There are now nearly 2 job openings for every unemployed person in the US. This indicates a very strong labor market. Analysts believed there was a correlation between the market decline and fears of a tougher Fed's stance amid a strong labor market. Moreover, they expect the Fed to raise the rate by 0.75% on September 21. However, the situation may change after the release of September inflation data. If the inflation report confirms a sharp slowdown in August, the Fed might raise the rate only by 0.5%.

Notably, the ECB is likely to raise the rate at least by 0.5% as early as September 8. This move will favor the euro.

New York Fed President John Williams dismissed speculation about a possible Fed rate cut in 2023 amid the economic downturn. He believes the Fed should raise the rate to 3.5% and not reduce it.

The market now estimates that the Fed will raise the rate by 0.75% with a 70% probability.

The yield on the benchmark 10-year Treasury notes is 3.15%.

Energy. Yesterday, oil prices fell sharply by 5%. Brent crude oil is trading at $100. Oil market is unstable. Earlier, oil prices also jumped by 5% overnight. The OPEC meeting is due on September 5.

Europe is facing a natural gas crisis. Yesterday, Russian energy giant Gazprom again halted gas supplies via the Nord Stream 1 pipeline. The EU countries continue to buy gas from all sources to fill their gas storages. Currently, the gas storage facilities are nearly 80% full. Before Gazprom halted its gas supplies, the ICE price dropped below $2,700. Last week's high was $3,400. Nevertheless, Germany's gas storage facilities have already reached 83%.

Facing an energy crisis, Germany said it was ready to discuss a possible cap on Russian gas prices. This situation may change Netherland's position which had previously objected to this proposal.

China's economic reports are better than forecasts. The service sector activity is 52.6, while the industrial sector activity is 49. These readings are below July, however, they are better than forecasts.

The US ADP jobs report will be released today. According to forecasts, the job growth is 250,000 - 300,000. However, nonfarm payrolls will be published on Friday.

Conclusion. The US market broke through the 50-day moving average. This is not favorable for buying. However, it did not fall much lower. Cautious buying is possible.