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Research Market strategy
by Swissquote Analysts
Daily Market Brief

Equities Eye Recovery After Worst Decline in 5 Months


Equities Eye Recovery After Worst Decline in 5 Months

By Strategy Desk

The US stock market was closed on Monday, but the futures on the benchmark indexes are pointing to recovery attempts, except for Nasdaq. Last week, US equities saw their worst decline in over five months, slashing gains accumulated over the previous five weeks. The indices hit the lowest level last Friday, and their futures have rebounded slightly since then.

At the time of writing, futures on the Dow Jones and the S&P 500 are up 0.76% and 0.44%, respectively. However, Nasdaq futures are still flashing red, losing 0.33% for the day.

While the nosedive from last week cannot be clearly explained by any particular fundamentals, investors believe that the correction was caused by worries that the tech rally boosted valuations to overbought and unsustainable levels.

Asian stocks are mostly bullish on Tuesday, as equities recover from the last week selloff.

China’s Shanghai Composite is now up 0.21% as it reversed earlier losses. The Shenzhen Component is down 1.08% given that it’s more oriented to tech stocks, which still cannot recover.

The tensions between the US and China have worsened further after US President Donald Trump threatened to curb the economic relationship with China. Trump pledged to bring jobs back to the US from China and said that the US was losing billions of dollars. If the US didn’t do business with China, it wouldn’t lose those billions, the president concluded, stressing the word “decoupling” again.

Trump’s comments came after June comments made by Treasury Secretary Steven Mnuchin, who said that the two economies would be forced to decouple if China didn’t permit American companies to compete on a fair basis.

Besides the old conflict with the US, China has deteriorated relationships with India, as the two countries are debating over the border.

Hong Kong’s Hang Seng Index is up 0.14% after initial losses.

Japan’s Nikkei 225 has gained 0.66%, even as the country confirmed the worst contraction since World War 2. Japan’s GDP contracted 28.1% y/y in the second quarter, slightly better than analysts’ estimates of a 28.6% decline. Nevertheless, household spending and the current account readings for July fell short of expectations. The sentiment is supported by investors’ confidence that Yoshihide Suga of the ruling party will replace incumbent Prime Minister Shinzo Abe.

South Korea’s KOSPI is up 0.75% and Australia’s ASX 200 has added 0.80% amid hopes for a COVID-19 vaccine that may come to Australia as early as in the first months of 2021.

Elsewhere, European equities are diverging from the US tech nosedive, with DAX, FTSE, and CAC gaining about 2% on Monday. Their futures are now edging up as well.

In the commodity market, oil prices continue to decline to update their lowest levels since the beginning of July. Prices are responding to increased worries that the potential increase in coronavirus cases could further damage demand for crude. Besides this, the US Labor Day marked the end of the summer driving season in the US.

WTI has tumbled 1.89% to $39.02, while Brent is more stable, falling 0.17% to $41.95.

Yesterday, crude prices intensified their bearishness after Saudi Arabia cut October prices for the Asian markets.

Meanwhile, gold futures are moving sideways, though the metal is now up 0.41% thanks to a leap a few minutes ago. The safe-haven might try to reverse its longer-term downtrend as the US reported increasing new cases of coronavirus in 22 states.

In FX, the US dollar is steady on Tuesday. EUR/USD was flashing red but has recovered losses and is up 0.06% thanks to the latest move. The attention will be focused on the European Central Bank’s Thursday meeting. While most analysts don’t expect the central bank to change its policy, it still might express concerns over a strong euro, which would put pressure on the bloc’s currency that has rallied since May.

The pound continues to decline against majors, as the British government is thinking to override the existing Brexit withdrawal agreement with the EU and make some changes to “extremely specific areas” in the bill. European leaders warned that there would be no deal if the UK decided to pass over the existing agreement. Another round of negotiations will start later today in London. UK Prime Minister Boris Johnson said that Britain wasn’t afraid of a no-deal Brexit at all. If that happens, the UK would just move on, the PM said.