After last week’s big drops in the equity markets, things have definitely calmed down. The major indices across Europe have started the day positively, following a positive close on Wall Street the day before.
When markets are priced for perfection, a slight shift in sentiment causes much damage. This is what we saw last week, after U.S. jobs report showed wage growth accelerated at its quickest pace since mid-2009.
Crude oil and the stock market took great red-hot economic news and tried to turn it into bad news. Red hot economic data, unlike anything we have seen in years, raised fears that the Federal Reserve would have to move quickly and raise interest rates. Yet, what the economic data is saying about potential future energy demand is almost mindboggling and the fracker better get fracking as we may have a hard time meeting future demand.
Is this the beginning of a deeper selloff or just a short-term shake out? Lets first step out of the forest to see the trees; the S&P 500 is still up 3% on the year. What caused last week’s selling? It's difficult to pinpoint one main catalyst but here are a few. First and foremost, we discussed a trend line on last Monday’s Morning Express at the 2850 area which would be critical to keeping this immediate-term uptrend intact.
U.S. equity markets posted their biggest one-day loss since August 2017 with the Dow dropping 362 points and the S&P 500 losing 31.10, both over the 1% mark. The fall came just hours before the President gave his State of the Union speech on Capitol Hill and hailed the strength of the U.S. economy, the strength of the stock market and the continued trend of job creation.
The dollar has started the new week on the front-foot after dropping over 1.5% last week. The greenback has fallen for five consecutive weeks, so the rise at the start of this week may very well be an oversold bounce rather than a trend reversal.
The U.S. dollar’s worst start in 21 years has reminded many investors of trade wars, particularly after U.S. Treasury Secretary Mnuchin commented about the benefits of a weaker dollar and the decision by President Trump to impose tariffs on imported solar panels and washing machines.
Rumours surrounded this week going from shrinking Chinese appetite of U.S. bonds to speculation that the United States would pull out of NAFTA and while real economic indicators on Friday showed stronger U.S. inflation and retail sales it did little for the struggling US dollar. Economic growth outside of the US is accelerating and monetary policy is expected to tighten more abroad putting pressure on the greenback.