Equity markets remain under pressure this morning, with the VIX, FX and gold markets all also pointing to slight risk off. European indices, already underperforming Wall Street, were down for the fourth consecutive day. US index futures recovered a little after the close last night but they too looked heavy. Today’s key data release is the weekly US jobless claims at 13:30 BST, expected to reveal another big rise — to the tune of 2.5 million — claims for unemployment benefits. Though claims have been falling from record highs, the falls over the last four weeks have not been as fast as expected by economists. Another disappointment today could hurt the already-downbeat sentiment.
So, it looks like investors are finally making a more sober assessment of the global economy, with even US market participants realising that they may have pushed equity prices too high in this economic environment. US technology stocks in particular have been flying after the big drop in March, driving the Nasdaq near its previous peak. However, over the last couple of days, the sector has stopped going higher, tracking the wider markets.
There is a growing belief among analysts that the vast central bank and government stimulus packages announced due to the COVID-19 pandemic is not enough to compensate for the bearish factors weighing on the markets. Unemployment has skyrocketed across the globe and companies are filing for bankruptcies left right and centre. The worst part is that there is no way of knowing when things will go back to normal and whether there will be another and subsequent rounds of infections to contend with. So, while central banks and governments are doing all they can to address the supply side of the economy, demand from households and businesses could nonetheless remain soft for a long time and undermine economic recovery. Certainly, the chances for a so-called V-shaped recovery looks very slim, something many economists agree on with even the Fed Chairman ruling it out. Jay Powell yesterday also ruled out negative interest rates, despite Donald Trump being in favour, and this has also helped to weigh on sentiment.
Still, talks that we may revisit the March lows are a little premature in so far as the major indices are concerned. While it is certainly possible, traders need to focus on what the markets are doing in the short term. Right now, the trend has slowly started to turn bearish again which suggests we may see some further weakness in the days ahead. However, there is no way of knowing how far the selling could go. And with all the central bank money flying around, even this latest mini dip could be bought, despite the uncertain economic times we are living in. So, keep an open mind and trade from one level to the next.
That being said, the FTSE looks quite heavy and should it break the neckline of this head and shoulders reversal pattern then things could get interesting – certainly for the bears!
