Market Overview

9 September 2020

Are There Any Reasons For Further Market Correction?

The global stocks are trying to find a solid ground to stand on after several days of a powerful downside correction. The broad-based S&P500 index futures fell under the ice below 3,300 points during the Asian early trading hours on Wednesday, weighing down also the Shanghai Composite (SSEC) index, which slipped by 1.86% beneath the water today. The high-tech Nasdaq 100 index fell below 11,000 points, but it was not there for long, and the whole shoot got its bearings later, with the S&P500 futures breaking 3,350 waymark and the Nasdaq prices soaring above 11,250 points by European midday.

The technical adjustment adventures for the stock prices are hardly to be addressed for now with a phrase like "the end crowns the work". This concept has to face a challenge at least in the course of the U.S. trading session today, before a stronger rebound could be assumed as a possible basic scenario. However, the investment community has not so many objective reasons to think about a real possibility of a big sell-off across the entire spectrum of different market assets.

Some traders make reference to a delay to a COVID-19 vaccine testing as AstraZeneca, a British-Swedish pharmaceutical company, announced late Tuesday it had paused a late-stage trial of one of the leading vaccine candidates after reports that one study participant had an unexplained side effect. But, even AstraZeneca stocks dropped only 0.4% in European trading originally, and then climbed 2.1% again, as investors were relatively satisfied with the explanation that the pause was "a routine action which has to happen whenever there is a potentially unexplained illness in one of the trials."

Another excuse for worries was that the United Kingdom authorities tightened rules surrounding social gatherings, limiting groups to a maximum of six people, as well as some travel restrictions inside the EU are still there. However, most of the newly detected coronavirus cases in European countries are asymptomatic, and there are clearly no intentions to repeat lockdown situations from any of the leading political figures.

The U.S. President Donald Trump launched a fresh verbal attack against China, promising a “decoupling” of the American economy from the Chinese one if he is re-elected in November. “We will… end our reliance on China once and for all,” Trump said on Tuesday. He threatened to impose “massive tariffs” on imports from China and to block from federal contracts all the U.S. companies that outsource jobs to China. But, all of that was looking more like his usual pre-election propaganda.

One of the main catalysts of yesterday's intraday sell-off in the high-tech sector, to a large degree, were Tesla shares. But Tesla plunged 21% compared with the previous day's close just because of the announcement by Standard & Poor’s committee on Friday that Tesla would not be admitted to the S&P 500 index this year. This fact disappointed many hopes that the passively-managed money owned by funds tracking the S&P 500 index would be forced to buy Tesla just automatically, in order to comply with their investment mandates.

This could be a charming subject of a separate conversation to speculate about the true reasons for the surprise exclusion of a hyping Tesla from the S&P 500 index list, in spite of four profitable quarters in a row. The problem for the S&P index committee could be sources of Tesla's earnings. For example, the company receives hundreds of millions of U.S. Dollars a year just from other automakers, who pay Tesla for the so-called ZEV credits. According to the law regulations in a number of states, automakers are required to produce a certain number of zero-emission vehicles. But, if they don't, they should buy ZEV credits from the companies that make these cars, and actually Tesla is the biggest electric car producer and beneficiary of such laws. Too high volatility in Tesla shares could be another reason, and yesterday's move only confirmed this. Anyway, the Tesla case is an important but an isolated incident, accounting for only about 1.5% of all S&P 500 companies' capitalisation. 

The energy sector was another big troublemaker, with oil prices falling below $40 per barrel for the Brent benchmark. It happened due to a fresh $1.5 per barrel discount announced by Saudi manufacturers for Chinese and other Asian oil orders for the autumn season. That attracted some of the market’s attention again to a worsening supply/demand balance, as oil refiners had taken maximum advantage of the second-quarter collapse in prices to buy huge volumes of oil on better prices before. The weekly report of the American Petroleum Institute (API) on U.S. oil inventories is going to be released on late Wednesday evening, as it is delayed due to the long Labour Day weekend. More important official inventories data by the U.S. Energy Information Administration (EIA) are scheduled on Thursday.

These reports can give at least some lucid intervals for the energy sector weather, and several hours before most of the investors will be all eyes at the European Central Bank (ECB) rhetoric. Some signs that the European economic recovery is slowing and more expensive single currency makes the ECB relying on an intensive monetary stimulus message, and many in the market are expecting to hear such a dovish talk from the financial regulator.

The more dovish the ECB and the U.S. Federal Reserve are, the easier for stock markets would be to choose the proper moment to move again from the downward correction phase to a new wave of price rally. The Federal Reserve already shifted its inflation targets a couple of weeks ago with a clear hint for several years more of near-zero interest rates and for the good "money printer" job. So, markets now need a reasonable move from the ECB, without rushing headlong and within reasonable limits, but a decisive move with a clear program of what the European regulator is planning to do.


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

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