Equity Markets to Settle Down after Adjusting Lower 5-10%?

This article was written by David Dixon of Viper Wealth Creation.

The tumultuous start to 2016 continued last week with equity markets tumbling further after some respite on Thursday. The S&P 500 in Chicago finished at 1880 after touching a low of 1857 on Friday.

Stocks

All eyes are still on stock markets which are closing in on a 10% correction since the start of this year at or close to 1830 but already achieved since the peak of 2130 achieved back in May 2015 at a level of 1917.

This marks a substantial but some would say much needed healthy correction in equity valuations and may be an adjustment as the Fed “takes away the punchbowl” of zero interest rates.

It is very dangerous to play bottom fishing however a low may be close at hand with the Fed unlikely to raise rates quickly and the ECB , BOJ and other central banks prepared to continue printing money to keep a lid or even reduce longer term rates.

A full blown “official” bear market is some way below on a fall below 1700 as measured by the S&P 500 index.

FX market

On the FX market further JPY strength has accompanied lower equity valuations and “higher beta” currencies like AUD have suffered alongside sterling. Should we see a bounce from the lows in Equities Equities Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling pa Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling pa Read this Term then I expect some respite at quite stretched levels.

EUR/USD is in a band of 1.0725/1.1075 with most trading happening between 1.0800/1.0975. This range could be challenged this week when Mario Draghi holds a press conference on Thursday after no change by the ECB. There was a split in opinion at the ECB regarding the need for further stimulus at the last meeting when 10 basis points further into negative territory was placed on deposits held at the Central Bank and an extension of the duration of QE. Since that meeting it looks even less likely the euro zone will see the target set for inflation just below 2% anytime soon so any comments or not related to further stimulus will affect the single currency. It may be too soon so a push towards the upper part of the range may ensue but I expect sellers above 1.10.

Sterling and Aussie

Sterling has been hammered in recent times mainly on expectations for BOE rate hikes pushed way back and concerns regarding potential “Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Read this Term”. Cable is at levels not seen since 2010 as safe haven greenback strength and a move away from the pound took hold.

Sterling weakened further against the euro into a range of 0.7450/0.7750 which if broken to the upside will move quickly to 0.79 or even 0.80. This all seems a bit overdone to me and I await a pull back soon. As mentioned previously I would look to short the pound against JPY but at current levels near 166.50 looks stretched with a move back above 170 more likely than a move lower at this time. Of course this is equity market dependant so any further falls in stock valuations would see 160 come into play. I am looking for a bounce to 172 to go short with 155 the target later on when the referendum date has been announced.

The Aussie has been pushed lower as the risk off environment took hold and could well be headed for 0.63 against US$ this year but again any bounce in equities will delay this. The Chinese GDP and industrial production numbers on Tuesday will be closely watched but it is difficult to see anything other than sellers coming in should AUD/USD breach 0.70. With volatile conditions likely to flare up at any time the Aussie is unlikely to have many friends while any hint of lower rates from the RBA would send the pair much lower.

Oil and gold

Oil is seemingly headed to low to USD 20s with Iranian production back after sanctions were lifted by the West. At some point the market will reach a low and it may take large oil corporate failures to find the plateau. This could weigh on Fed moves as inflation and production figures are pushed lower if happens.

Gold failed to stay above USD 1100 and for now looks to have lost some of its safe haven lustre. I expect more later in the year from the shiny metal.

This week is likely to start quietly with the US on holiday but will be firmly focused on equity markets starting with the Chinese numbers mentioned above. I expect a calmer market this week but wait to see clear signs that stock markets have consolidated at these lower levels before deciding on any firm themes. The greenback looks ripe for a correction should equities rally as does the JPY but look to trade short term as markets like USD/JPY can move from 116 to 118 and back again very quickly in this climate.

David Dixon is the Chief Dealer and Analyst at Viper Wealth Creation. David has over 20 years experience trading on behalf of NatWest where the focus was primarily in the spot, forward and derivatives markets. Since retiring from the professional arena David has become an integral part of the Viper Wealth Creation team.

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