Senior Market Strategist

Total Content 76

Articles 59

Time for a correction?

By David Morrison  |  01/02/2018 16:22
”WallStreetCrash?”/
This article considers whether this week's equity sell-off is simply month-end profit-taking or the start of a more significant correction.

Pull-back overdue

All the major US stock indices opened sharply higher this afternoon following a hefty sell-off over the previous two sessions. Of course, commentators have been saying for a while now that a pull-back is well overdue, particularly given the rally since the beginning of the New Year. This week’s retracement has been more substantial than anything we’ve experienced since the summer of 2016 in the aftermath of the UK’s surprise vote to leave the European Union.

State of the Union

Last night’s State of the Union address from President Trump helped to lift US stock index futures in early trade. Mr Trump was widely credited with delivering an upbeat and inclusive speech which tied in with a similarly statesman-like performance in Davos last week. Once again, the president promised to put “America first” but there was relief that he pulled back from any aggressive protectionist rhetoric.

Strong jobs number

There was also the release of a strong ADP Employment number ahead of today’s open. This helped to lift sentiment and raised expectations for a better-than-expected Non-Farm Payroll number on Friday. A further improvement in the jobs data along with a pick-up in Average Hourly Earnings will help to lift confidence and boost inflation expectations.

Yellen’s last meeting as Chair

Later this evening sees the culmination of a two-day meeting of the Federal Reserve. This will be Janet Yellen’s last as Chair as she now hands over to Jerome Powell. This transition is expected to be smooth and uneventful as Mr Powell is understood to hold similar views on monetary policy to Janet Yellen. Additionally, according to the CME’s FedWatch Tool there is effectively no chance of a change in the fed funds rate after tonight’s meeting, although there’s a 72% likelihood of a 25 basis point rate hike in March.

Bond yields trigger sell-off

But back to the equity sell-off at the beginning of the week. The trigger for the move was the pick-up in global bond yields as there’s a growing expectation of higher interest rates, not just in the US but across the Euro zone and Japan as well. The key 10-year US Treasury yield rose above 2.73% to hit its highest level since April 2014. German bund yields have also risen sharply over the past six weeks, as have those for Japanese Government bonds. Overall, the reason for this is positive as investors see further evidence of synchronised global economic growth and a pick-up in inflation after years of deflationary fears (which makes debt repayment so much more problematic).

Tighter monetary policy

But the flipside to a pick-up in growth and inflation is that developed-market central banks are all now looking to tighten monetary policy at the same time. Given that their zero/negative interest rate policies and quantitative easing programmes have been responsible for boosting asset prices over the last nine years, the withdrawal of such stimulus is likely to have the reverse effect. Fortunately, it would appear that rate hikes and the wind-down of central bank balance sheets is happening at a glacial pace. Stock market bulls have faith that growth in corporate revenues and earnings will easily counter the effects of increased borrowing costs. That will be the case for many companies. However, it won’t take a big move in interest rates for over-indebted businesses to struggle to refinance or repay existing debt.

Infrastructure spending

At the moment, investors are still riding the wave of euphoria that followed Trump’s tax reform package passing through Congress last month. This was the fulfilment of a major campaign promise along with regulatory reform which is also taking place. These fiscal measures have helped offset the negative market effects of monetary tightening, at least in investors’ minds. The third promise was on infrastructure spending – something that the president spoke about in last night’s State of the Union address. In fact, Mr Trump’s call for $1.5 trillion worth of spending to upgrade US roads, rail network and airports was a major catalyst behind today’s early bounce-back in US stock indices. However, a number of analysts have already come out to insist that there isn’t a snowball’s chance in hell of anything being passed by Congress ahead of this year’s mid-term elections. That may be so, although it’s worth remembering that’s what everyone was saying about tax reform just a fortnight before it passed through both Houses.  

Correction or profit-taking?

The equity market is well overdue a pull-back with a number of respected industry professionals expecting a significant correction (typically understood to be a move of 10% or more) at some stage in 2018. Yet this week’s move could be nothing more than a bout of month-end profit-taking, triggered by a temporary increase in yields. If so, then today’s early bounce-back demonstrates yet again how anxious investors and traders are to have exposure to this market as they rush to buy even the shallowest of dips. But could this time be different? After all, the rally since the beginning of this year has been explosive with it being repeatedly referred to as a classic “melt-up” - which typically precedes a significant sell-off. Not only that, but as today’s session progressed the US majors pulled back from their best levels as the yield on the US 10-year suddenly broke back above 2.73%.

This week is crucial

So this week could prove to be key in deciding the direction of travel over the next month or so. We may see the US majors break higher and go on to make fresh records. If so, then all that means is that a more meaningful correction has been postponed. But if prices don’t bounce back sharply this week then it could signal the start of a more protracted sell-off. If this happens then at least we’ll have some intermediate highs to work with and this can help with technical analysis going forward. 

 

Share

Author's Other Opinion & Analysis

  • Dollar spikes higher
    By David Morrison  |  12/01/2019 14:31

    EURUSD falls back below 1.1500

  • Another look at the EURUSD
    By David Morrison  |  19/04/2018 15:06

    Trump accuses China and Russia of “playing the currency devaluation game”.

  • S&P 500 update
    By David Morrison  |  18/04/2018 15:53

    The US stock market steadied last week

  • Weekly market wrap
    By David Morrison  |  14/04/2018 15:19

    The first quarter earnings season got underway last week

  • EURUSD update
    By David Morrison  |  12/04/2018 08:14

    Still range-bound near highs

  • Weekly market wrap
    By David Morrison  |  07/04/2018 15:29

    US payrolls disappoint

  • Non-Farm Payroll look-ahead
    By David Morrison  |  06/04/2018 13:48

    Tomorrow sees the latest update for arguably the most important, and potentially market-moving, global data release – US Non-Farm Payrolls.

  • S&P 500 update
    By David Morrison  |  05/04/2018 14:31

    S&P 500 breaks below 200-day moving average

  • Weekly market wrap
    By David Morrison  |  30/03/2018 13:38

    This Easter holiday couldn’t really come at a worse time

  • S&P 500 - update
    By David Morrison  |  28/03/2018 13:47

    The S&P since February's sell-off

  • Weekly look-ahead
    By David Morrison  |  24/03/2018 16:59

    Holiday-shortened week

  • NASDAQ leads sell-off
    By David Morrison  |  23/03/2018 15:53

    Markets lead lower by tech sell-off

  • Fed meeting in focus
    By David Morrison  |  22/03/2018 10:50

    Investors on edge ahead of Fed decision

  • Weekly Outlook
    By David Morrison  |  17/03/2018 15:41

    Fed meeting in focus

  • S&P 500 - the technical picture
    By David Morrison  |  15/03/2018 16:34

    This week has seen the US majors pull back from their best levels

  • Weekly look-ahead
    By David Morrison  |  10/03/2018 16:16

    The headline payroll number smashed above the high end of expectations

  • Non-Farm Payroll look-ahead
    By David Morrison  |  09/03/2018 14:30

    All eyes on wage growth

  • ECB and BOJ meetings in focus
    By David Morrison  |  08/03/2018 17:24

    Investors experienced a shock last month

  • Weekly Outlook
    By David Morrison  |  06/03/2018 10:15

    This is a big week for financial markets

  • Euro bounces, but political uncertainty remains
    By David Morrison  |  03/03/2018 11:01

    The euro rallied sharply overnight

  • Weekly look-ahead
    By David Morrison  |  24/02/2018 16:58

    US stock index futures were pushing higher ahead of Friday’s US open.

  • FOMC minutes and the German DAX
    By David Morrison  |  23/02/2018 14:33

    Investors were initially wrong-footed by minutes from a Federal Reserve meeting.

  • FOMC minutes in focus
    By David Morrison  |  22/02/2018 11:47

    All eyes are on the release of minutes from the Fed’s January FOMC meeting

  • Situation remains unresolved
    By David Morrison  |  21/02/2018 13:09

    The stock market correction may have further to go

  • Weekly Outlook
    By David Morrison  |  17/02/2018 16:02

    Global stock indices fought back last week

  • Out of the woods? Perhaps not
    By David Morrison  |  16/02/2018 13:37

    Yesterday brought the latest update on US inflation

  • Inflation and the S&P 500
    By David Morrison  |  13/02/2018 16:30

    This article will focus on the S&P 500

  • Weekly Outlook
    By David Morrison  |  10/02/2018 16:35

    Friday was a roller-coaster session to round off a tumultuous week.

  • What now?
    By David Morrison  |  09/02/2018 15:54

    The current sell-off in global equities has been a long time coming.

  • Traders focus on volatility
    By David Morrison  |  07/02/2018 16:55

    Yesterday the Dow posted its biggest ever one-day loss in points terms

  • Rising yields lift troubled dollar
    By David Morrison  |  06/02/2018 16:17

    The US dollar stages a modest recovery.

  • Weekly look-ahead
    By David Morrison  |  03/02/2018 16:12

    Equity sell-off resumes while dollar rallies

  • Crude prices dip
    By David Morrison  |  30/01/2018 15:57

    Oil slides as dollar rallies

  • Weekly look-ahead
    By David Morrison  |  27/01/2018 15:16

    What's in store for key markets

  • Dollar hits fresh 3-year lows
    By David Morrison  |  25/01/2018 16:38

    US dollar plunges ahead of Trump's Davos speech

  • Wall Street hits fresh highs
    By David Morrison  |  24/01/2018 15:46

    The three-day US government shutdown ended on Monday

  • Market Round-up
    By David Morrison  |  23/01/2018 16:53

    Monday marked day three of the US government shutdown.

  • Weekly look-ahead
    By David Morrison  |  20/01/2018 16:30

    The last couple of weeks have seen a number of significant technical breakouts

  • S&P 500 – Weekly Chart
    By David Morrison  |  19/01/2018 15:24

    Putting price action into context

  • Crude pulls back from three-year highs
    By David Morrison  |  18/01/2018 16:32

    On Monday WTI and Brent hit their highest levels since early December 2014

  • Gold, the dollar, bond yields and inflation
    By David Morrison  |  17/01/2018 15:00

    But in line with conventional wisdom the dollar’s sell-off triggered a sharp rally in gold.

  • Weekly look-ahead
    By David Morrison  |  13/01/2018 16:50

    Earlier in the week the US majors had a slight wobble

  • Gold traders eyeing the dollar
    By David Morrison  |  12/01/2018 15:48

    This article considers the recent price action on gold

  • Chinese news rattles markets
    By David Morrison  |  11/01/2018 15:33

    Chinese officials recommend “slowing or halting”

  • Could stocks rally further?
    By David Morrison  |  09/01/2018 17:00

    Most European stock indices ended Monday’s session in positive territory, playing catch-up after Wall Street’s sharp rally last week.

  • Weekly look-ahead
    By David Morrison  |  06/01/2018 15:55

    We rounded off this week with the final Non-Farm Payroll report of 2017. Headline payrolls rose 148,000 which was well below the 190,000 increase expected.

  • Dow smashes through 25,000
    By David Morrison  |  05/01/2018 16:07

    Yesterday the US majors ended at fresh all-time highs and this helped to lift Asian Pacific indices overnight.

  • US indices hit fresh record highs
    By David Morrison  |  04/01/2018 16:08

    US stock indices made another strong upside move yesterday which took both the S&P 500 and NASDAQ Composite up to fresh record highs. The buying has continued throughout today’s session

  • Mixed start to New Year
    By David Morrison  |  03/01/2018 16:56

    The first trading day of 2018 brought a mixed session as far as global stock indices were concerned.

  • New Year round-up
    By David Morrison  |  30/12/2017 15:22

    As 2017 draws to a close, here’s a quick round-up of how a few key markets look going into next year.

  • What's Next for Crude Oil?
    By David Morrison  |  20/12/2017 14:42

    This article will focus on price action in the front month WTI contract rather than Brent. WTI tends to provide better technical signals than Brent – not always, but often enough to give a cleaner overall picture.

  • Equities soar on US tax reform hopes
    By David Morrison  |  19/12/2017 16:10

    US and European stock indices soared on Monday as investors priced in an increasing probability that President Trump will deliver on his promise of tax reform before year-end.

  • Weekly Outlook
    By David Morrison  |  16/12/2017 14:26

    Here’s a brief heads-up for the week beginning 18th December

  • Central Bank monetary policy meetings
    By David Morrison  |  15/12/2017 15:48

    Here’s a quick rundown of the highlights from this week’s monetary policy meetings from the European Central Bank, Bank of England and US Federal Reserve

  • Look-ahead to the Federal Reserve meeting
    By David Morrison  |  14/12/2017 08:49

    Crucially, this week’s Fed meeting also brings an update to the FOMC’s Summary of Economic Projections.

  • Cboe launches Bitcoin futures
    By David Morrison  |  12/12/2017 16:26

    Listing Bitcoin futures on mainstream exchanges should ultimately help to boost the digital currency’s legitimacy and lead to more widespread acceptance.

  • Non-Farm Payroll look-ahead: 6 things you should know
    By David Morrison  |  09/12/2017 09:55

    So, here’s what to look for: the consensus expectation is for the headline Non-Farm Payrolls to rise 200,000 in November.

  • EURUSD – key events to consider
    By David Morrison  |  07/12/2017 17:07

    The dollar got a boost this week on the increased likelihood of an agreement on US tax reform being reached before the year-end.

Show More Articles
Back

Login to TheFXApp Account

Your TheFXApp account gives you access to the tools that we offer our customers including our
Technical Studies & Sentiment for your accounts.

Forgot Password?

Don't you have a TheFXApp account? With a few easy steps you can easily register to TheFXApp

Create a TheFXApp's Account

Your TheFXApp account gives you access to the tools that we offer our customers including our Technical Studies & Sentiment for your accounts.

register_ty

Thank you!

Welcome to TheFXApp family!

You have succesfully completed the registration.
We will send you an e-mail to give you some
instructions and our Terms and Conditions!
Our account representatives will be contacting you as
soon as possible. If you have any further questions
please do not hesitate to mail us via info@thefxapp.com