So, after Wednesday’s big drop, the key development to watch today is whether there will be any further downside follow-through for stocks. Since the March low was made, every dip has so far been bought. Will this be another such occasion, despite rising concerns over virus resurgence and resistance? Or, are we finally going to see a sizeable correction this time? The direction of equity indices will likely determine that of FX and most certainly other risk-sensitive assets too, including crude and copper prices.
Judging by Wednesday’s 2.5%-plus sell-off for major indices, and the sharp drop in crude oil prices, it looks like investors are growing increasingly worried about the economic recovery. The persistence of the virus and the rebound in cases has sparked concerns that some US states may be forced to unwind or slow measures to reopen businesses. Several US state governors have already said that they are prepared to reinforce restrictions to contain the surge in infections, after more than half of US states reported a rise in new cases, while the likes of Florida and California have been breaking daily records.
Indeed, Wednesday was a true risk-off session and there was some follow through during Asian hours overnight. However, European indices managed to bounce off their lows after the open here, causing US index futures to trim their losses after being around 1% lower earlier. In FX, the pound also staged a turnaround after yesterday’s decline, along with commodity dollars. But it is early days and there’s plenty of time left on the day for the trends to change again. This morning’s rebound could be due to short-side profit-taking and some bargain hunting after some stocks such as airlines took a beating the day before.
What happens over the coming days and weeks will depend a lot on whether investors believe the localised spikes in coronavirus will severely impact US economic growth and whether a second wave will hit Europe and other regions that have dealt with the issue somewhat successfully than places like the US and Brazil. So, watch the sectors most sensitive or tied to the progress of the economic reopening, such as travel and tourism stocks for clues.
From a technical point of view, the S&P 500 has been struggling to break key resistance levels of late, suggesting the buyers may be losing control. However, the key support levels have thus far been defended, with the index CFD continuing to hold its own above the 200-day moving average and the psychologically-important 3,000 level. In other words, price action is range-bound. A daily close below 3K would be a bearish development, while a close above 3130 resistance would be bullish. Interim resistance comes in around 3072, the low from Tuesday which also happens to tie in with the 21-day exponential.
