Daily Outlook

A turn to decline or short profit-taking? We’ll find out today

The new week in the financial markets starts in the red zone. This shows us that investors are set up to close their risk positions. The downside reversal occurred on Thursday, bringing the S&P500 down to 5.5% of Wednesday’s levels.

The pressure in the stock markets in previous days could be explained by short-term factors, such as profit-taking at the end of the month and increased caution before a long weekend. Many commentators point out that stock indices are unreasonably high against the background of such uncertain expectations of recovery and the fundamental data.

However, a new annoying factor has intensified over the weekend. The US is increasing with threatening to impose sanctions on China for withholding information about the coronavirus in the first stages. This approach is reviving fears in markets of another chapter of trade wars. It is impossible to imagine a worse moment to resume tariffs and disputes, which even in normal times destabilize markets.

From this point, today can be indicative of a further trend for equities. In late March and early April, S&P500 corrected more than 8% of the local peak. However, in the first days of the month, it turned to growth. So far, hopes for a repeat of this scenario remain in place.

Before the start of the European session, we observe buying of stocks and indices after the decline at the opening. If this trend is sustained, the traditional market saying “sell in May and go away” could be questioned.

Will there be enough buyers for securities under current conditions? Perhaps the most confident buyers at the moment are central banks, but they are not buying stocks, only some bonds. Therefore, stock markets can only hope that consumers, having raised their savings, will direct them to the demands and won’t put cash “under the mattress”. Also among the main buyers are funds: they will invest in the purchase of shares as insurance against a depreciation of money printed at an unprecedented rate.

The FxPro Analyst Team

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