Market Overview

14 July 2020

Profit-taking Pressured Markets for a Correction

Many of the global companies' shares had their heads a little bit out of the clouds by the end of the New York trading session yesterday. The fundamental eclipse of California restrictions could be a hand cue but pure technical reasons seemed to be the main driver for the correction in stock markets. Leaders of the stocks’ downward retreat was the same FAANG group of assets (Facebook, Amazon, Apple, Netflix and Google) that have surged enormously, and probably excessively in recent weeks.

Each of the "big five" managed to post a fresh and almost fantastic all-time price record on Monday, which caused a crowded and very fast profit-taking in the last hours of the trading day. Amazon and Netflix were the most successful in moving up and then down, as Amazon was trading at $2,930 as recently as early last week, then finished near $3200 and sharply soared up to the $3344 peak just for the half of Monday's American session. Unsurprisingly, Amazon's prices have adjusted as deep as below $3100 in the course of a very quick correction wave. A similar somersault from the $575 area to below $525 per share was performed yesterday by Netflix shares that were priced near $455 on July 1 and $393.5 just before the start of the corona virus crisis.

Google met a cool response at $1575, but fell only $1515, probably because the previous high was not beaten too much, and many investors are still expecting a further growth here. As for the Apple Co shares, despite the official news on additional purchases of Apple corporate bonds by the U.S. Federal Reserve in July, and a rumoured increase in the volume of Apple shares in the portfolio of Warren Buffett’s Berkshire Hathaway fund, yesterday's peak price of $400 per share seemed to be too aggressive after a modest $325 pre-crisis high in January, especially if compared to the scale of the movement from the bottom of $213 in March.

Fresh Monday's highs near $250 a share might not have seemed so excessive for Facebook, considering recent problems with the advertiser's temporary boycott due to mild filtering algorithms. It happened in the frame of the “Stop Hate For Profit” solidarity action, when big corporations came together in a feeling that they were losing their image because of what they considered to be a too weak moderation policy on Facebook. The social network giant did not allow the blocking  of enough content which was considered hateful or which had racial prejudice signs in a time when the Black Lives Matter movement was at its peak.

As a result of the general change in the market mood, the U.S. broad market S&P500 index immediately fell back to the area of 3150, having barely managed to update its two-month highs near 3235 during Monday’s session. A much stronger correction awaited the high-tech Nasdaq 100 index, which soared above the 11,000 point record, but then was forced to fall quickly to the 10,575 mark again.

Recent news from California was not inspiring, but this still looks more like a temporary hitch – even for the state of California itself - that is unlikely to reverse all the drawn-out processes that the  economy went through on a nationwide level in order to re-open businesses. CNBC reported on Monday evening that the California Governor Gavin Newsom ordered all counties in the state to again close all bars and for all indoor operations of restaurants, movie theatres and museums to cease in the state, as Covid-19 cases continued to climb. Indoor services will also be temporarily banned for fitness centres, malls, personal care services, hair salons and barbershops for 30 counties on the so-called California’s monitoring list, including Los Angeles, San Diego and Orange counties, which represent 80% of the state’s population. The same businesses will be allowed to operate outdoors, if possible, except for bars, he said.

Newsom added that the state recorded 8,358 new cases on Sunday, with the state’s positivity rate or the percentage of all tests returning positive has ticked up to 7.4%. “The data suggests not everyone is acting with common sense,” Newsom said at a press conference. California hospitals reported an increase in the number of coronavirus patients, growing by 28% over a two-week period, according to the Governor's words. 

Reuters also reported today that Canada and the United States are set to extend a ban on non-essential travel that was imposed to fight the coronavirus outbreak, although a final decision has not been taken, two Ottawa sources familiar with the matter said on Monday. Canadian Prime Minister Justin Trudeau earlier told reporters that talks between two nations on the ban were continuing and said: “We will have more to say later this week, I’m sure.” Doug Ford, premier of Ontario, Canada’s most populous province, on Monday said that the situation in the U.S.’s Florida was “staggering” and “scary.”

Most populated Australian states have also tightened borders and restricted pub visits since Tuesday. Hong Kong recorded 52 new cases on Monday, including 41 that were locally transmitted, health authorities said. Since late January, Hong Kong has reported 1,522 cases in total and the local media officially reported eighth deaths on Monday. Walt Disney Co said it is temporarily closing its Hong Kong Disneyland theme park starting Wednesday. The World Health Organisation (WHO) warned that the pandemic would worsen if countries failed to adhere to strict precautions. “Let me be blunt, too many countries are headed in the wrong direction, the virus remains public enemy number one,” WHO Director General Tedros Adhanom Ghebreyesus said during a virtual briefing on Monday.

Some growing tensions were reported over the weekend between Washington and Beijing after the United States rejected China’s disputed claims to offshore resources in most of the South China Sea. According to some sources, Reuters announced that the Trump Administration also plans to scrap a 2013 auditing agreement that could foreshadow a broader crackdown on U.S.-listed Chinese firms.

All this background information, put together, plus the start of the week when corporate reports for the second quarter of 2020 are to be released- which was clearly one of the worst times for most of the world’s companies - create conditions for more repositioning in the market and for a possible deeper, temporary adjustment for prices of the wide spectrum of assets and composite stock indexes. But, this might be a temporary break just before the next steps of this extended rally to heaven are taken. There is just a little doubt that cheaper prices of most popular assets may very soon be used for new purchases.


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
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