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December 18, 2018 @ 13:14 +03:00
Key US indices lost more than 2% on Monday, so the S&P500 closed at the lowest levels since November. It is also worth to note the sales prevalence in the last few hours of the American session: with rare exceptions, we have seen such a dynamic since previous month. Primarily, this is due to a reduction in the retail funds position.
The greatest pressure is experiencing by those stock that dragged the market earlier. So, Amazon lost 4.5% and Nasdaq fell by 15% from peak levels in early October.
This sale increased after drop below important support levels, where stocks were supported on October and November dips. Such anxiety, in our opinion, is caused by worries about the Fed’s hawkishness, and is also associated with technical factors.
The FOMC had previously predicted three rate increases in 2019. Available data from the United States suggest that the general background is strong and confident enough for now. However, many US companies are international, and the global economy is quickly losing its shape.
Must mention that three raises are able to additional shaking the ground of global growth, increasing pressure on stocks. Another thing is also true: the softness of the Fed’s rhetoric — say, a decrease in the number of increases to 1-2 next year and a willingness to further orient on the situation — can provide some fundamental support to the entire market.
At the same time, the Fed is experiencing a verbal attack by the US Administration, which again and again shows discontent with the announced plans for “growth in three stages.” There is a high chance that Powell will still succumb to this pressure and will make a decision that will unfold the stocks trend for a short time.
Usually, stock market weakening accompanied with a dollar growth, but not this time. Now investors are trying to stay away from US assets, due to the uncertainty around the monetary policy.
Softening of the Fed’s tone will be a negative factor for currency, and this time it is reasonable to expect that if markets perceive a shift in rhetoric as a signal to buy beaten stocks, the dollar will be under pressure, and the growth trend that prevailed in the outgoing year will be replaced by a long-term one with possible weakening DXY down to the 88 levels and rising EURUSD at 1.25 area.
If Powell acts on the fact, guided by the internal data and current world indicators – then the shares will be threatened by the decline extension. Next important support area is on the September 2017th consolidation, with 5% below current levels and at the border of the bear market (-20% off the peak).
The Fed’s rigidity, during the stock market falling, can return the demand for the dollar as a defensive asset, aiming it at the 2017 highs (about 6.5% higher than current levels): for EURUSD it will be a direct road to 1.05.