Dubai: Global stock markets have taken a hint from Netflix’s Stranger Things and entered The Upside Down. Strong US jobs data on Friday led to selling activity in equities, and the repercussions of that report are expected to continue this week.
The report showed that 224,000 non-farm jobs were added to the US economy in June — well over projections of 160,000 jobs. The data forced investors to lower their expectations for an interest-rate cut by the US Federal Reserve, which was precisely what they were pinning their hopes on, which resulted in markets closing lower on Friday. The US dollar is expected to strengthen this week, hurting gold prices.
Vrajesh Bhandari, senior portfolio manager at Al Mal’s Capital asset management arm, said that a stronger dollar is also likely to hurt emerging markets. For US equities, though, the impact of tempered expectations of a rate cut was largely priced in on Friday.
“What I see is that given the employment numbers are good, we’re not expecting a rate cut in July … but I still believe there’s strong support for US equity markets,” he said.
But that’s not to say that investors have given up entirely on the possibility of an interest-rate cut.
“This is at best a pause,” Bhandari told Gulf News. “Jobs data is one of the factors that affect monetary policy, but there are other parts of the [US] economy which are not as strong, and these factors are still at work. This is why investors were starting to expect rate cuts in the first place.”
He pointed that slower economic growth globally and trade tensions between the US and China were among factors that would back a decision to lower interest rates.
Bhandari added that there are “absolutely” still expectations for a rate cut in 2019.
Analysts at Saxo Bank in a note also highlighted stocks’ surprise reactions to strong jobs data, saying that global stocks are still “defying gravity” and showing “the biggest disconnect from global leading indicators since 2017.” This is as they bet on lower interest rates, rather than focus on the economic fundamentals behind those.
In the bonds market, the US 10-year Treasuries saw yields jump after the payroll report. Analysts from Dubai’s Al Mal pointed, however, that yields “stacked at critical resistance levels once again,” implying it may take stronger trading activity than currently seen to push yields higher.