US and European futures indicate that traders are on the back foot, which may lead to a negative open. August has been a brutal month for the US and European equities, and September is set to pick up the momentum where traders left things in the previous month.
The Sterling is getting battered against the dollar, reaching a price level that we have not seen in more than 20 months. Several reasons are pushing the Sterling lower, led by the living-cost crisis in the UK, which has pushed the consumers into a corner. In fact, consumers in the UK are squeezed to such a level that we have not seen in nearly a century, and the hope is that the new Prime Minister will deliver some relief package, which should be in billions, to ease the current crisis. Liz Truss, the most favourite among bookies as the next Prime Minister, has already ruled out any tax hikes for this year or rationing of energy in the coming winter. Her second promise looks shaky because the energy crisis is unavoidable, and it would be challenging to avoid energy rationing. Nonetheless, the most important thing which matters for consumers is not energy rationing but, in fact, a support package that can ease off their living standards.
As for the BOE, there are still strong chances that the BOE will continue its hawkish monetary policy and another interest rate hike of 50 basis points is still firmly on the cards. Higher interest rates have also made life a lot more difficult for consumers in the UK, but given the fact that inflation is hoovering near the 40-year high level, the Bank of England has little to no chance but to act.
In the US, we saw the US ADP number missing the forecast by a mile; the number confirmed weakness in the US labour market, which many have talked about for a while. Remember, the Fed has been very confident in its monetary policy approach because it believes that the US labour market is solid, but that is not the case anymore. The warning signs have been coming all along during the earnings seasons when many companies announced that they would reduce the head counts or freeze their hiring process. So now, the ADP number has confirmed all those messages, and the Fed has a significant dilemma in front of them: whether they can continue to increase the interest rates in the US at the same pace as before.
Today, we have the US ISM Manufacturing number due, the last critical reading before we see the US NFP number due tomorrow. Suppose the US ISM manufacturing PMI number shows a slight improvement. In that case, we may see some revival of confidence among traders. A weak reading of ISM manufacturing PMI is highly likely to make the sentiment even worse, which could make the weekly sell-off for the S&P 500 and Dow Jones even worse as both of these stock indices are on track to strong some severe losses for this week.
Oil prices remain under pressure, and we saw a lot of gas coming out of them yesterday. Today, weakness in the Chinese Caixin manufacturing PMI reading further confirmed oil demand will be hit by a more adverse environment in the coming days. The big question among investors and traders is if OPEC will do something about supply cuts while the prices have started to rattle their cage once again. Can OPEC+ allow oil prices to fall from their normal levels of the 40s and 50s? The answer is that it is improbable we will see OPEC sitting on its hands and doing nothing about the oil supply. Soft demand is likely to meet with tighter supply, which means that in the coming days, we are likely to see higher oil prices, and the new norm for oil prices could be between $90 to $100.