Market Analysis

Global market index declines, while the dollar increases as Powell dampens optimism

Amos Simanungkalit · 01 Oct 202438.3K Views

On Monday, MSCI's global equities index declined, while the dollar strengthened as Federal Reserve Chair Jerome Powell dampened expectations for a significant rate cut. Meanwhile, oil futures closed flat after a volatile session amid rising concerns over the conflict in the Middle East.

Brent crude, the global benchmark, posted its largest monthly loss since November 2022, falling 17% in the third quarter—the biggest drop in a year—as fears over weakening global demand outweighed concerns about supply disruptions from the Middle East conflict.

Stock markets experienced volatility after Powell indicated that the Federal Reserve was not rushing to cut interest rates. While some investors had anticipated more aggressive rate cuts, Powell signaled two potential 25 basis point reductions this year, contingent on economic conditions.

“That was less dovish than the market had expected,” said Robert Phipps, director at Per Stirling Capital Management in Austin, Texas. He added, “Some investors had been hoping for a 50 basis point cut by year-end, but Powell’s remarks likely removed that possibility.”

Wall Street had rallied the previous week, spurred by positive U.S. inflation data, which boosted hopes for a larger rate cut. However, on Monday, the probability of a 50 basis point cut in November dropped to 36.7% from 53.3% on Friday, according to CME Group's FedWatch tool.

Despite initial losses during Powell’s speech, stocks recovered, with the S&P 500 and Dow Jones Industrial Average hitting record closing highs on the last day of the quarter, driven by traders adjusting their portfolios.

Rick Meckler, a partner at Cherry Lane Investments in New Jersey, suggested, “The price gains at the end of the day may have been influenced by quarter-end window dressing.”

The Dow rose 17.15 points (0.04%) to close at 42,330.15, the S&P 500 added 24.31 points (0.42%) to reach 5,762.48, and the Nasdaq Composite gained 69.58 points (0.38%) to 18,189.17. Over the month, the S&P 500 advanced 2.01%, with a 5.53% rise for the quarter.

Globally, MSCI's index of stocks dipped by 0.21% on the day, closing at 851.02. However, it was up around 2% for the month and 6% for the quarter.

Phipps also noted that investors were closely monitoring developments in the Middle East, the aftermath of Hurricane Helene, a looming U.S. port worker strike, and economic news from China.

Chinese stocks surged, with the blue-chip CSI300 index climbing 8.5%, its best one-day performance since 2008, thanks to government stimulus measures. This rally added to the index’s 25% rise over the last five trading sessions.

The U.S. dollar strengthened after Powell’s more hawkish stance reduced expectations for a significant rate cut in November. “He sounded more hawkish,” said Steve Englander, head of G10 FX Research at Standard Chartered Bank, adding that the market might now be "concerned that the Fed is serious about smaller 25 basis point cuts."

The dollar index, which measures the greenback against major currencies, rose 0.32% to 100.76. The euro fell 0.27% to $1.1133, and the dollar strengthened by 1% against the Japanese yen to 143.61.

In the bond market, the U.S. 10-year Treasury yield increased by 3.6 basis points to 3.785%, while the 2-year yield, closely linked to rate expectations, rose by 7.4 basis points to 3.637%. The yield spread between the two- and 10-year Treasury notes, seen as a key economic indicator, stood at a positive 14.6 basis points.

In energy markets, U.S. crude fell 1 cent to settle at $68.17 per barrel, marking a 7% decline for September and a 16% drop for the quarter—its largest since Q3 2023. Brent crude dropped 21 cents to $71.77, recording a 9% fall for September and a near 17% quarterly decline, the biggest in a year.

Gold, which had rallied on U.S. monetary easing and heightened geopolitical tensions, paused as it posted its largest quarterly gain since early 2020. Spot gold declined 1% to $2,631.39 per ounce, while U.S. gold futures fell 0.54% to $2,629.90 per ounce.