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The situation on US stock markets is getting worse. Recent indicators and internal dynamics indicate that professional and retail investors who actively buy shares are running out of free money. Risks of increased volatility and a sharp decline in the market are on the horizon. This will happen in the event of simultaneous bad news.
Europe is on the verge of closing due to quarantine measures similar to that of spring. The US is constantly reporting a record increase in coronavirus infections, and the negotiations on the stimulus package in Washington have so far not led to anything.
All this spoils the mood of investors who were counting on the imminent appearance of a vaccine and the restoration of global economic growth.
The latest round of pressure pushed key US indicators back to their 3-week lows. The market is now not just a correction, but a short-term bearish trend that can grow into something more. Investors may be cautious ahead of the US presidential election, which will exacerbate the downward momentum. With this scenario developing, the S&P 500 could quickly traverse the important 200-day moving average support line, which is 7% below the current indicator. The nervousness of the markets can be seen before the elections and after the announcement of the first results.
It is worth noting that a certain panic attack that we are now witnessing is connected not only with pre-election uncertainty. After a record number of cases, a record death rate from coronavirus may go. The authorities will be able to stop this only with the help of economic losses, to which the markets will react with lightning speed.
At times like this, investors go into defensive assets like the US dollar. The USD index is recovering as demand surged sharply. In the event of a stock market crash, the greenback will rise, and much more than the markets expect. For example, Unigestion strategists now hold a long dynamic position in the USD. At the same time, Goldman Sachs, BlackRock, and UBS Asset Management continue to sell ahead of the US elections.
Bloomberg writes that now the net speculative short position on the US dollar exceeds $23 billion. The indicator approached the extreme values of 2011.
Meanwhile, the growth of the Japanese yen against the US dollar is alarming. The decline in the USD/JPY pair indicates increased craving for a safe haven. We observed the weakness of this pair a week ago. Then it managed to maintain its position above the psychologically important mark 104. However, in recent sessions, the yen rate is approaching the level of 104.10.
Note that the growth of the yen, observed a week earlier, was rather on its own, but now it is supported by the movement of stock indicators. USD / JPY and S&P 500 are declining at the same time. The European market also plays up to them. The DAX losses from the peak values of October amounted to 10%. The pressure on the indicator is likely due to the discussed new coronavirus restrictions in Germany. All of this is troubling. If the USD / JPY pair and the US and German stock markets do not reverse, then volatility in a wide range of financial assets, including raw materials and currencies of the EM sector, will sharply increase.
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