Chief Market Strategist at FXTM
Equity
markets sold off aggressively on Wednesday dragging the S&P 500 2.4% lower
for the day and the index is now down nearly 9% from its record high set at the
start of the month. We are almost in correction territory for the world’s most
followed stock market, which is defined as a 10% fall from its latest peak.
Meanwhile the tech heavy Nasdaq
composite is already in one, having lost 12% in value from its August highs.
Investors
who missed the six-month rally since March may find it compelling to dive in
now as many stocks have corrected their excessive valuations, especially on the
Tech front. The likes of Tesla, Apple and Amazon have been dragged 15% to 30%
lower in a matter of three weeks. The selloff however has been broader this
time, with the energy sector back to the April levels when Oil futures
contracts fell into negative territory for the first time ever.
If the
latest selloff is just about the removal of froth and a healthy correction, it
may indicate we are near a bottom and it’s time to reaccumulate stocks. This
approach would be based on the notion that the US and the global economy will
continue heading in the right direction towards a full recovery. And with
central banks across the globe remaining extremely generous with their
policies, we should not worry about some bumps along the road.
However,
the risks of a stalling recovery are growing as spikes in Covid-19 cases surge across Europe and expectations are for similar
trends in the US if no action is taken. The virus continues to be winning at
this stage and there are no clear answers as to when a vaccine will be
delivered.
Fed
Chair Jerome Powell and some of his
colleagues are pressing Congress for more fiscal stimulus, in a sign that
monetary policy cannot do much more to support the economy. But heading into
the Presidential election and given how divided Congress is, the chances of
delivering a stimulus package soon is fading. Add to this President Trump’s refusal to commit to a peaceful handover of power
if he loses the election on 3 November and it all makes great ingredients for
extreme uncertainty and volatility in asset prices.
Overall,
we continue to see the risks skewed to the downside and more volatility in the
next two months, so despite the recent correction in prices, it does not look
tempting to turn overly bullish. Unless Congress surprises us with another
convincing round of fiscal stimulus, it will be wise to wait for more
attractive valuations.
Gold is another asset that has
been sold aggressively over the past four days. This is mainly due to the
stronger Dollar, a slight increase in real yields and a break below the $1,900
support level. Expect Gold to gain some traction here as its one of the few
assets available to hedge against future expected volatility and the prolonged
period of low interest rates.
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