European markets are set to open higher this morning after facing an extremely volatile week. The turbulence in the market was as high as it could be and the reason behind this was the same old global growth concerns. Throughout this week, there wasn’t any particular sector under which investors could find shelter, but surely the stocks which are green on the red day are the most attractive ones to buy. The Dax index has kissed the lows which we experienced during the last month, as investors are still not comfortable in holding riskier assets. The upward trend line remains the focus and the key support level of 9300 has a significant importance amid investors.
This morning’s optimism among investors is mainly due to the last night’s speech by Janet Yellen. She maintained the same dovish stance. Investors are certainly cheering the news that she hasn’t picked up a particular set date to raise the interest rate, but she did balance her dovish tone by adding that the rate hike is still a possibility later this year.
If the U.S. is hiking the rates on the basis that its economy is solid and the Fed are confident in their approach, then surely raising the interest rate should be a good news. But, the fact is that the U.S. manufacturing sector is showing some serious sign of cracks and this worries the most. For instance, companies are not feeling to beef up their balance sheet with more funds to stimulate the growth, but rather they are already cutting the jobs to protect their dividends. Caterpillar (NYSE:CAT) is a primary example of this. The firm is protecting its balance sheet from further dents and wants to keep its investors happy by maintaining its dividend, but given the growth, climate, they have no other option but to reduce their cost by cutting jobs.
There is nothing new in this that the U.S. Federal reserve will be increasing the rates when most of the major central banks around the world will still be maintaining their positions to cut the interest rates further to stimulate the economy, but just how much impact will this have on the mighty dollar, no one can surely say and this is another factor for the fed to take under consideration before they do actually raise the interest rates. Inflation is one of the major pillars of the Fed policy, and given that the inflation expectations are at nearly over six years low, it makes the fed position even more challenging.
The economic docket still has some firecracker left for this week. We have the final reading for the U.S. Q2 GDP and the forecast is for 3.7%, a number which may lift the investor appetite for risk. But it is important to understand that what matters the most is the present condition of the economy if you want to gauge the future prospects and the Q2 GDP may not add that much of positive sentiment to the investor’s risk equation.
DISCLOSURE & DISCLAIMER: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam