Global Markets in Turmoil: Fed's Response Holds the Key to Wall Street's Fate

The second week of August is showing a glimmer of hope for Wall Street.

by Faruk Imamovic
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Global Markets in Turmoil: Fed's Response Holds the Key to Wall Street's Fate

The second week of August is showing a glimmer of hope for Wall Street. After a turbulent start to the month, marked by the biggest weekly decline since March's banking crisis, U.S. futures indicate a potential lift. A significant surge in back-end yields was among the contributors to last week's downturn, placing Wall Street in a precarious position.

Recent data showcased a deceleration in U.S. job growth, providing a brief sigh of relief. Yet, the magnitude and speed of the bond market's shifts have left many industry experts on edge. Anshul Sehgal, the co-head of U.S. rates trading at Goldman Sachs, expressed his concerns in a note to clients, stating, "The sell off in back-end rates is concerning." Furthermore, he added, "In terms of Equities, they have been trading growth recently, rather than multiples, so it's uncertain what the impact will be, particularly with cross-currents influencing GDP."

Global Markets and the Fed's Potential Reaction

While Wall Street's future seems slightly promising, global markets paint a more mixed picture.

European equities are down approximately 0.4%, seemingly trying to recalibrate after a delayed drop on Wall Street at the week's end. On the other hand, Asian shares experienced a marginal decrease as the new week dawned. Despite the global ebb and flow, the optimistic sentiment on Wall Street could stem from an anticipation of the Federal Reserve's response.

If financial conditions continue to constrict, it might push the Fed to reconsider its approach to tightening and perhaps even shift towards cutting rates earlier than expected. Sehgal from Goldman Sachs speculates, "Overall, this should actually reduce the chance of another hike from the Fed...

and if we see another 75bp sell-off then it might actually accelerate the process of them cutting back to neutral." In currency news, the dollar index saw an uptick of around 0.2%, buoyed by a dwindling euro. This change came in the wake of German industrial production's sharper-than-expected decline in June.

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