Markets Q4 Outlook: Dow Jones, US Dollar, Gold, Fed, Euro, ECB, Oil, Volatility Returns？

Markets Q4 Outlook: Dow Jones, US Dollar, Gold, Fed, Euro, ECB, Oil, Volatility Returns？

As investors head into the fourth quarter, the VIX Volatility Index - often referred to as the market‘s ’fear gauge - is in an uptrend. In September, US benchmark stock indices saw some of the worst monthly performance since March 2020. In fact, the S&P 500 and Nasdaq 100 finished the third quarter little changed. More importantly, they trimmed most of their gains. The Dow Jones declined.

Most of the market jitters unfolded into the tail end of the third quarter. That is also in line with historical standards. September tends to be dismal month for sentiment as traders come back online from the summer lull. A lot of attention was on the Federal Reserve, where Chair Jerome Powell signaled that policy tapering could be completed by the middle of next year.

This pushed the 10-year Treasury yield, and front-end government bond rates, higher. A combination of this and volatility aided the haven-linked US Dollar. The Greenback outperformed most of its peers in Q3, especially against the sentiment-linked Australian Dollar. Fears of a Chinese economic slowdown, especially amid the fluid environment around Evergrande, weighed against growth-linked assets.

Gold prices weakened in September, trimming gains from earlier in the third quarter. A rising US Dollar and bond yields could make it a difficult environment for XAU/USD. Meanwhile, crude oil prices trimmed losses in the third quarter. Robust demand estimates, coupled with supply constraints, are bolstering energy prices. OPEC doesnt seem poised to increase output into the end of the year.

All eyes are on the US government as the fourth quarter gets underway. While a shutdown has been avoided for now, the debt ceiling has not yet been raised as Democrats and Republicans struggle to come to terms. September‘s non-farm payrolls report will also be closely watched. A materially lower outcome risks derailing the central bank’s lose policy unwinding.

Meanwhile in Europe, the European Central Bank could remain relatively dovish compared to the Federal Reserve. That could leave EUR/USD biased lower as policymakers stick to the script that inflation could be transitory. In the coming months, this narrative will be increasingly tested. What else is in store for financial markets in the fourth quarter？

US DOLLAR WEEKLY PERFORMANCE AGAINST CURRENCIES AND GOLD