Market Overview

29 June 2020

Markets Tune to a Short-Term but Not Fatal Downside Correction

As many EU officials, including the European Central Bank's frontwomen Christine Lagarde, are deliberately articulating thoughts that the peak of the COVID-19 crisis on the continent may already be behind us, a sharp increase in the number of newly detected carriers was reported last Friday and over the weekend in several U.S. states. Greg Abbott, a Republican Texas governor, ordered the closure of all bars and similar establishments that receive more than 51% of their gross receipts from the sale of alcoholic beverages and to reduce capacity limits for dine-in restaurants to 50% from 75%, also gatherings of 100 or more people now must be approved by the state authorities. Washington residents are temporarily re-ordered to wear masks, and several states have now obliged visitors from several "hot spots" of the country to follow a 14-day quarantine.

All of these symptoms of some "individual shutdowns", in White House adviser Larry Kudlow's apt words, affect the mental state of markets. The World Health Organisation reported that almost 190,000 new cases for the 24-hour period through to the early hours of Sunday, is a new high. Anyway, investors got nervous, and the news flow put pressure on the U.S. and global stock indexes since many portfolio assets have managed to significantly rise in price over the past two months. Clearly prices of some shares made it in advance, more for the future prospect of recovering in usual corporate profit and dividends. So, perhaps, they have slightly overdone it. As a result, for many highly overbought stocks, even in the leading high-tech segment, the downward correction caused by strong profit-taking had already started at the end of the previous week.

For example, the shares of the Internet giant Amazon just showed a fresh all-time high at $2795 per share but made a reversal pin bar candlestick forming also a double top pattern clearly visible on H4 charts, with Friday's closing price around $2693. A similar threatening picture has emerged for Facebook, Netflix, and many other record-breaking assets. However, the wave of fixing "extra" profits in such assets also provoked a moderate sell-off of some other shares, which failed to give the same financial effect, as some investors possibly decided not to deal with risks here and now, and probably they hope to purchase these assets later and at even cheaper prices. Thus, technical and fundamental pieces of the puzzle overlaid on money-management system formed a high-probability picture of a quite possible deeper downside correction.

If the sell-off could be supported by a larger number of market participants in the first half of the week then new bottoms for a variety of assets may appear quickly. At the same time, there are still no signs that such a correction could be truly protracted or even middle-term. Despite the statistical spikes in the U.S. infection numbers, mortality rates are much lower than during the first wave of the pandemic, mainly because the new infections have been largely confined to younger people. Testing now finds mostly asymptomatic, mild COVID cases, Dr. Deborah Birx, coordinator of the White House Coronavirus Task Force said in an exclusive interview with FOX 11’s Elex Michaelson on “The Issue Is”. The U.S. has conducted more than 31 million tests altogether, but "recent reports suggest anywhere from 40-60% of young people could be asymptomatic, learning of their infections only through increased testing," she emphasised. The physician, who is now set to visit hotspots in Texas and Arizona with Vice President Mike Pence, said that "as testing increases, the raw number of cases will rise, but that it’s important to make sure that the rate of positivity does not rise as well". Right now, as she said, California should be cautious, as "the test-positive rate is creeping up" there.

And Dr Anthony Fauci, the US National Institute of Allergy and Infection Diseases Director, also commented: "We are facing a serious problem in certain areas". At the same time, "the overwhelming majority of people getting infected are young people", and that is just the people "you can see in crowds enjoying themselves - understandably, no blame there, but the thing that you really need to realize that when you do that, you are part of the process, as when you are infected you infect someone else, who clearly will infect someone else... and ultimately you infect someone who is vulnerable... so, you have an individual responsibility to yourself". It is interesting to see that health officials talk about this individual responsibility, but they don't even touch on the theme of a possible new total quarantine measures cycle.

These and some other news from the wires probably kept the markets from more dips today in the European trading session. Asian stock futures on the US S&P500 broad market index and U.S. high-tech Nasdaq index have deepened their bottoms immediately since the opening, but European markets have not yet picked up the wave of decline. Potentially supporting information may include, for example, the following reports: the profits of Chinese industrial enterprises rebounded strongly in May, up to 6.0% year-on year (vs May 2019) and -19.6% year-to-date (since the beginning of 2020). And it happened in such a positive way for the first time since November 2019, signalling that the world’s second-largest, or even the largest economy, is continuing to recover. That is also good news for Europe as China is one of the largest export markets for European goods. European business and the consumer survey indicator for June was also published today and showed a pleasant 75.7 points level after 67.5 points only a month before. German Chancellor Angela Merkel is meeting with French President Emmanuel Macron for talks later today. They are likely going to discuss how they can get all states to agreement on the recovery fund for the region, and work out critical details about repayable loans or grants for the hard hit countries. The International Monetary Fund weighed into the debate, with Chief Economist Gita Gopinath saying in Der Spiegel interview that a substantial part of the EU package has to consist of grants.

So, the market’s prospects in the longer-run are still moderately bright, as it produces at least a dull gleam by its distance light upper beam, but the weather on stocks right in the nearest days are clouded and even may result in a small stormy wind. Nothing apocalyptic, but it's better to close windows to keep the house and money safe.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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