Global Sell-Off

Analisi Giornaliera - 06/02/2018

Stock Market Plunge


Hawkish and aggressive stance from the Central Banks around the world could blame for the huge stock market plunged.

Stocks Biggest Crash

Analysts try to explain the biggest drop on equities. The index capped its worst day since the first time the U.S. lost credit rating, topping the collapse that followed China’s shock devaluation of the yuan, the Brexit selloff and anxieties heading into the presidential election.  The Dow Jones Industrial Average’s 4.6% loss on Monday was its largest in percentage terms since August 2011, and in absolute numbers, the 1,500 points loss was the worst intraday fall in market history.

Repercussions of Friday’s US jobs report caused a huge sell off in the global equities market. The trigger for the sell-off was a sharp rise in U.S. bond yields following Friday’s data that showed U.S. wages increasing at the fastest pace since 2009, raising the alarm about higher inflation and with it potentially higher interest rates. Higher inflation would lead to higher rates and, in turn, rising borrowing costs for companies.

U.S. stocks plunged the most in 6 1/2 years, with the Dow Jones Industrial Average losing more than 1,100 points, as the equity selloff reached a fever pitch amid rising concern that inflation will force interest rates higher. VIX soars. Volatility roared back into American equity markets, as the S&P 500 Index sank 4.1% to wipe out January’s gains and even fell in the negative territory for the year. The Cboe Volatility Index increased more than double its highest level in 2 1/2 years.

Some analysts also believe markets tend to get a bit nervous when the U.S. Federal Reserve has a new leadership. The new Fed chief Jerome Powell, succeeded yesterday Janet Yellen. He is expected to continue Yellen’s stance of gradual tightening. Still, some investors regard a change in the Fed leadership as a source of policy uncertainty.


RBA Kept Interest Rates Unchanged

The Reserve Bank of Australia left interest rates unchanged at 1.50% as expected. The central bank said that prices are likely to remain low for some time as shown on the soft CPI report for the Q4. However, inflation is expected to gradually pick-up and the central forecast is for CPI to climb above 2% in 2018. The RBA is also optimistic about the labor market expecting a further gradual reduction in the unemployment rate.

Policymakers again reminded us that rates are where they need to be to achieve the inflation target over time.

Important to follow is Governor’s Lowe speech during Thursday’s trading session. Will he be giving some hope? The Aussie lost against the USD falling down to the bullish trend line that dates back to December 2017, mainly due to the lack of urgency from policymakers to act on rates.


Oil Prices in Red

On Tuesday, oil prices dropped by more than 1%, extending the drop as global financial markets tumbled lower in the wake of one of the biggest intra-day falls ever registered on Wall Street.

Brent crude futures were more than $4 below their high-point for 2018, hit last month. U.S. West Texas Intermediate (WTI) crude futures were more than $3 off their 2018 high.

The strengthening of the US dollar makes commodities more expensive to buy, hence oil futures sold off.

Traders also said that the correction in oil is also being driven by fundamentals. Despite the Organization of the Petroleum Exporting Countries (OPEC) and Russia cutting production in order to tighten the market, supply of crude remains in high.

U.S. shale oil production has jumped by almost 18% since mid-2016 to 10 million barrels per day (bpd), surpassing top exporter Saudi Arabia. Only Russia produces more, averaging 10.98 million bpd in 2017.

And U.S. oil output will likely rise further. The amount of rigs drilling for oil rose to 765 by late January, more than double the 316 that were in operation during 2016’s production lull.


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