Markets attempt to recover from recent rout

Summary:

• US stocks look to recover after worst day of the year

• Industrial data helps Dax rise

• Gold hits highest level in 6 years

• Top 3 charts of the week: US500, GBPUSD and AUDUSD

The week started with a bang for stock markets with large declines seen around the globe. The S&P500 ended down by more than 3% for its largest drop of the year while the DJIA tumbled by almost 800 points in what was the 6th largest drop on record in terms of points. While the largest drop ever sounds dramatic, this is due in no small part to the large nominal value of the index, with the drop in percentage terms not even in the top 400.

The seeds for the declines were sowed last week when the Fed delivered a less dovish message than investors had hoped for and Trump announced additional tariffs on China, but the straw that broke the camel’s back was a sharp drop in the Chinese Yuan, with the currency falling to its lowest level in a decade against the US dollar. 

The fallout was felt not just in equities but across all asset classes with traditional safe havens such as Gold, US bonds and the Japanese Yen all gaining with the precious metal hitting its highest level since 2013 this morning. There’s also been a notable rally in Bitcoin in recent sessions and while the rationale behind such a volatile asset being treated as a safe haven remains highly questionable, there has been a clear and concerted move higher since the Tariff news dropped. The Cryptocurrency has rallied 20% since Thursday evening and moved back above the $12000 mark once more.  

While the reasons for the declines are well versed and still remain in place, there is a case to be made that the selling has been a little overdone. Such extremes as those seen above can often cause a reversion to the mean in the short term and it would not be too surprising to see a bounce today. Longer term, there’s been some technical damage done but the prior swing lows which coincide with the 38.2-41.4% Fib (2734-2757) retracement remain in place. This could be seen as a key line in the sand to watch going forward. 

Orders in the German economy rebounded 2.5% in monthly terms led by a robust 5% rise in foreign orders (especially in those coming from non-Euro Area countries - this category jumped as much as 8.6%, the most since mid-2014). At the same time, the data showed that domestic demand remains sluggish with orders declining 1%, the largest monthly decrease since March. Overall, the data cannot be considered as a breakthrough in a widespread weakness in the German industrial sector. Thus, this release should not affect the ECB’s notion pointing to a resumption of monetary policy easing next month.

Our latest market alert can be found here. The article contains a short video below covering the latest technical situation on US500, DE30, Gold, Silver, USDJPY and Bitcoin in addition to our latest version of the Top 3 charts of the week.