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Stocks dumped as risk off continues

Fawad Razaqzada Fawad Razaqzada 08/07/2021
Stocks dumped as risk off continues Stocks dumped as risk off continues
Stocks dumped as risk off continues Fawad Razaqzada
After the S&P 500 hit a new record in the aftermath of the FOMC minutes last night, the markets have gone into a bit of a reverse. Already struggling, Chinese and Japanese shares sold off again during Asian hours, which soured sentiment as European investors started their day. Here, the major indices fell about 1% shortly after the open before extending their declines by mid-morning, with some indices showing losses of more 2% by midday in London. The risk off tone was evidenced elsewhere, too, with US futures, crude oil and copper prices all weakening.  Safe-haven currencies – the Japanese yen and Swiss franc – rallied, while risk-sensitive commodity dollars and EM currencies slumped. Bond prices continued to rise, causing their yields to fall further with the 10-year US Treasury dipping to 1.25%, its lowest since 16 February.  The falling yields weighed on banks with Barclays shedding nearly 4% to make it one of the worst performing stock on the FTSE 100. Gold found some mild support on the back of falling yields and risk-off tone. Will US investors save the day once again and buy this latest dip, or is this the start of a more meaningful correction?
 
So, what is going on?
 
This morning certainly, investors didn’t appear to be in a cheerful mood. It looks like optimism over a sharp global recovery has been replaced by mild fears that growth is nearing a peak and that central banks are likely to slowly taper their emergency stimulus measures. Rising cases of the delta variant of Covid-19 has weighed on the recovery prospects, with Japan officially declaring state of emergency for Tokyo just two weeks before the Olympics. The drop in yields is indicative of indicative of the death of the reflation trade, and I wonder whether this is to do with a big fall in commodity prices of later.  This week’s big drop in oil prices has certainly reduced inflation concerns a little.
 
Tapering concerns are also weighing on the markets. The FOMC’s last meeting minutes, released Wednesday, more or less confirmed policymakers are ready to taper QE, even though officials still felt that substantial further progress on the US economic recovery "was generally seen as not having yet been met."
 
Will the markets recover?
 
Surely if growth concerns rise and the recovery slows down again, the Fed may well delay tapering. What’s more, the European Central Bank is continuing to provide ample monetary stimulus. Today, the latter is expected to announce the outcome of an 18-month strategy review. Most ECB watchers are expecting the central bank to redefine its inflation target. Instead of the current "below but close to 2%,” the central bank is likely to declare a 2% target.
 
If so, this would effectively raise their inflation goal to 2%, allowing the central bank room to overshoot inflation if and when needed. In other words, the new strategy would allow the ECB to justify sustaining its ultra-loose monetary policy for longer.
 
Thus, the selling pressure could ease soon as investors realise that central bank support will be there if the economic recovery stalls, or there is a bit of turmoil in the markets.
 
That being said, things could potentially get uglier before the bargain hunters are tempted to dip their toes in.
 
DAX breaks down
 
As it is the “ECB day,” let’s keep an eye on the DAX. The German index has just broken out of its recent range, so there is likely to be more downside risks than upside in the short-term outlook. We could see a possible drop to test liquidity beneath 15280 soon. Key resistance now comes in around 15500.

DAX
Source: ThinkMarkets and TradingView.com
 
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
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Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
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Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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