US stocks drop as selling gathers pace


It hasn't been a day for the bulls...



Risk aversion rose further in the second half of the day, as US investors dumped stocks following sharp losses in Europe earlier, where the DAX was off by more than 3.5% on the session.

The vicious increase in coronavirus infections and virus-related lockdowns have added to concerns over the lack of progress on US fiscal stimulus as well as election uncertainty. Investors have been forced to scale back their optimistic recovery projections that they had been pricing in since the initial lockdowns back in March as they realise the road to recovery will be bumpier and longer than initially thought.

So far, however, the sell-off for stocks has been relatively mild. Investors remain convinced that governments and central banks will be there to step in again should the situation deteriorates, while the progress on developing vaccines and other COVID treatments means we are getting closer to fighting the disease more effectively.

But that’s not to say things won’t get even uglier in the short term – especially given the sheer number of big household names reporting their earnings this week.

Nasdaq
Source: ThinkMarkets and TradingView.com


USD/JPY on watch as risk-off trade gathers pace

Meanwhile, in the FX markets, the dollar has been bought amid the “risk-off” trade. The reserve currency tends to outperform at times of market turmoil. However, an even stronger haven currency tends to be the Japanese yen, which will be in focus anyway this week with the Bank of Japan meeting coming up. The USD/JPY therefore needs to be watched closely for a potential drop – either due to the ongoing “risk-off” trade, or potentially as a result of inaction by the BoJ.

At the time of writing, the USD/JPY was testing key resistance around the 105.00 handle, which in the past had been a key support level. Now broken, this level could offer resistance and prevent rates from going further higher. In fact, the UJ looks quite bearish and I wouldn’t be surprised if rates broke down from here:

USD/JPY
Source: ThinkMarkets and TradingView.com

The USD/JPY has been creating lower lows and lower highs, with each recovery attempt so far proving futile. If the sellers hold their ground here, then I think the next target would be the liquidity resting below last week’s low around 104.30ish. Thereafter, the liquidity below the recent low at 104.00 could be the target. And if there is acceptance below 104.00, then we could see an accelerated move lower in the days to come.

However, in the event the UJ breaks its bearish trend line and create a higher high above 105.75 – the most recent high – then at that point one would have to drop their bearish thoughts on this pair, for in this scenario there will be a risk for a sharp short-squeeze rally.



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