Markets staggered but resilient: all eyes are on oil and the dollar

World markets staggered briefly yesterday. At one point, it looked like we were witnessing the start of a sharp correction. However, by the end of the US trading session, buyers reappeared, predominantly in the sector of high-tech companies. As a result, Nasdaq100 closed with another gain of +0.3%, while S&P500 and Dow Jones lost 0.2% and 0.6%, respectively.

On the sellers’ side was a drop in the ISM service sector activity index in the US to 60.1 in June from 64 a month earlier, which followed a series of weak European reports. Service sector growth slowed more than expected. The index was dragged down by cooling in business activity, employment, and export orders.

Nevertheless, markets managed to digest the data, pushing back on the idea that clear signs of cooling would prevent the Fed from moving to actively curtail stimulus, which is most beneficial to growing companies relying on cheap funding.

This time, however, equity investors seem to have acted more mechanically. Currency and commodity markets were indicating increased anxiety.

USDJPY

USDJPY has been declining since the beginning of the month. The sell-off then could be attributed to the general weakening trend of the dollar against world currencies. But yesterday, the pair fell, along with the general strengthening of the dollar against other competitors. Too often, this has been a worrying signal of declining risk positions.

Furthermore, it resonates well with falling bond yields. A sinking USDJPY, a rising dollar and falling bond yields are old companions of risk-off and deleverage.

It is worth paying attention to the dynamics of this pair in today’s European and US sessions. Further declines should cause alarm in the markets and could quickly turn yesterday’s buyers into sellers. 

Oil

Oil reversed sharply to an intraday decline after updating near three-year highs. A sharp, more than 3% dip could be the start of a trend reversal, as we have seen more than once in mid-summer. In 2008 and 2014, oil reversed downwards in the first half of July, and both times it ended in an epic sell-off. There have also been several less dramatic, albeit very painful, declines.

The FxPro Analyst Team