Market Overview

1 September 2021

The "Worse Is Better" Principle Dominates the Market's Mood

The stocks at Wall Street finished their seventh straight months in moderate or solid gains. On the first day of September one can already state that August was marked by another record victory for both S&P 500 broad market index which is well above the 4,500 landmark and Nasdaq 100 index, mainly of companies in the tech sector, which is now consolidating higher than another round figure of 15,000 points. Apart from a very small and rather symbolic decline of average market's quotes in January, shortly after the new year's start, the overall U.S. shares' recovery is going on without long pauses since November 2020. That was just the time when it became absolutely clear that mass vaccination would bring relief to the global economy sooner or later, while monetary stimulus by central banks are not allowing the recovery growth to fade. 

The U.S. Dow Jones industrial index, as well as the pan-European Euro Stoxx 50, are only slightly behind the leaders now. Yet, they continue to move along their own upward tracks. Given the recent changes in forward guidance from the European Central Bank (ECB) in favour of long-term tolerance for inflation, followed by the ultra-dovish nature of speech by the Federal Reserve's (Fed) chairman Jerome Powell and his colleagues in Jackson Hole on August 27, markets have no particular grounds to worry too much about further pumping the capitalisation of major stocks with tens of billions of dollars and euros on regular monthly basis. Actual inflation spurts may complete the rest of the job of raising the market's quotes even higher this autumn, as long as the Fed considers inflation effects as being still not so serious and "transient" in the United States, and the same time nobody is going to put inflation dynamics under control in Europe before it would really create much tension. 

The European financial authorities have not announced any plans to reduce the volume of bond purchases this year at all. The team of the U.S. regulator's governing council only hinted they could slightly diminish the current $120 billion asset-buying programs making the first move at tapering direction, but it would still mean a rather fast pace of the printing press. Jerome Powell was unequivocal about the absence of "wage–price spiral" seen at times in the past. Also, referring to the period from 1950 through the early 1980s which "provides two important lessons for managing the risks and uncertainties we face today", the Fed's chairman stated it "taught monetary policymakers not to attempt to offset what are likely to be temporary fluctuations in inflation". He even emphasised that "responding may do more harm than good, particularly in an era where policy rates are much closer to the effective lower bound even in good times". 

The essence of Mr Powell's Jackson Hole speech may also be well concentrated in the excerpt of that kind: "If a central bank tightens policy in response to factors that turn out to be temporary, the main policy effects are likely to arrive after the need has passed. The ill-timed policy move unnecessarily slows hiring and other economic activity and [finally] pushes inflation lower than desired. Today, with substantial slack remaining in the labour market and the pandemic continuing, such a mistake could be particularly harmful". This topic may get an additional angle of view when the upcoming release of the U.S. non-farm payrolls will come out on Friday, September 3. 

According to Reuters' polls, economists predict job figures were likely increased by 750,000 last month, after rising as much as 943,000 in July. However, the "worse is better" principle may play its decisive role, as the Fed actually made a stronger labour market recovery pace a condition for tapering. At the same time, if the creation of new jobs becomes slower, it may be the perfect reason to still buy a rather high volume of assets for an extended time, so that the dollar "printing press" would continue to fill the markets and the banking system with additional portions of money. An important point here is just that the indicators of the American labour market would not fall too dramatically, just keeping a moderate pace is just "what the doctor ordered" to the stock markets. 

However, if non-farm payrolls or jobs in the private sector significantly exceed expectations, then it will also be an indecent reaction for the markets to fall down in response, this scenario can hardly be called a basic one. Thus, both main outcomes in this "fork", with a high probability, may pull the quotes of U.S. indexes even higher or at least leave them stable for further consolidation at the achieved levels. Indeed, it could be difficult to invent a bad scenario to spoil the overall uptrend dynamics. 

A similar tendency to keep a good heart when the data is slightly worse than expected, or even to use the principle "worse is better", is confirmed so far today by the intraday performance of European stock exchanges. German retail sales slumped 5.1% on the monthly basis in July, according to the fresh today's indications, way below expectations. Yet, the German Xetra Dax futures contract traded even 0.3% higher soon after the data release, while the Euro Stoxx 50 index hit the 4,250 new historical high, which all happened after more than 1% price gap at the opening moment. Tuesday’s Eurozone inflation data showed the consumer prices index (CPI) increased by 3.0% in August, far above the ECB’s 2.0% long-term target, but the accounts of the last ECB policy meeting acknowledged the risk of temporarily excessive inflation as acceptable for the first time in many years. 

The Chinese Caixin manufacturing purchasing managers index (PMI), released earlier on Wednesday, is at 49.2 points level, which is formally below the 50-mark indicating growth. Some partial lockdown measures to contain even the first signs of the latest corona outbreak in the country, plus anti-pollution initiatives of the government and high raw material prices seem to contribute to China’s factory activity entering a contraction territory. Yet, the European markets do not care continuing to grow, as inflation expectations are still a stronger driver for the corporate revenues, at least expressed in money terms, even if the nominal sales of production in tons or items may go down in the second half of the year. This approach has a good chance to become a leitmotif for the market's reaction to all the upcoming indicators of business activity coming from both sides of the Atlantic, which are traditionally released at the beginning of each month. Today's manufacturing PMI set by the U.S. Institute of Supply Management (ISM) is barely to be an exclusion.



Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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