Chief Market Strategist at FXTM
After
entering correction territory on Tuesday with an 11% decline from the highs,
the Nasdaq 100 rebounded strongly on Wednesday rising 3% and led by the most
beaten-up stocks, with Zoom Video Communications and Tesla up 11% on the day.
While a drop of this size from the peak sounds like a steep correction, it
remains a minor one given the index had rallied 83% from the March lows in a
mere five months. With a price to earnings ratio of 36, valuations for the
index are still significantly overstretched, hence we should expect more
volatility in the weeks to come heading into the US Presidential Elections.
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The
50-day moving average is offering strong support for the index and it needs a
break below this level to encourage further selling. So far, the move lower is
just being seen as the removal of some froth from the most overcrowded tech
trade in decades, but it requires another selloff of similar magnitude to bring
markets back to healthier levels. US
futures this morning have turned slightly positive after being in the red
earlier this morning.
Traders awaiting
Lagarde for guidance
The
Dollar has strengthened sharply over the course of seven trading days. The DXY
rallied from a low of 91.75 to 93.66 before giving up some of the gains
yesterday and in today’s early trade. While better than expected economic data
has lent some support to the Greenback, most of the rally was driven by the
selloff in equity markets and not a change in fundamentals.
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The
Euro has fallen from a two year high of 1.2011 to 1.1750 and is currently
trading slightly above 1.18 at the time of writing, with the single currency
still up 5.5% on the year.
The
European Central Bank policy announcement is the key event for the week and it
will be interesting to see what action will be taken following the Fed’s
adoption of average inflation targeting and comments from ECB’s Chief Economist
Philip Lane who said the EURUSD rate “does matter”.
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Latest
developments in the Eurozone and especially the improvement in economic data
rules out further easing for now, but given that the number of Covid-19 cases
are rising again and negotiations with the UK over Brexit are not going well,
the risks are mounting. The ECB had forecast inflation to reach 1.3% by 2022,
so any downward revision to this figure may mean more stimulus is on the way.
While
the ECB does not target a specific level for the Euro, Christine Lagarde may
reiterate Philip Lang’s concerns that further strength in the single currency
will hinder growth. Such a verbal intervention will likely bring the Euro
lower, but without indication of further easing in the upcoming policy
meetings, the selloff is likely to be short-lived.
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