Equity markets continue to be under pressure this morning, with the VIX, FX and gold markets also all pointing to a lower risk. European indices, which were already underperforming Wall Street, were down for the fourth consecutive day. US index futures recovered slightly after closing last night, but they also looked heavy. Today’s release of important data is the weekly US unemployment claims at 1 p.m. 13:30 BST, which is expected to reveal a new large increase – to a size of 2.5 million – unemployment benefit claim. Although claims have fallen from record highs, the decline over the past four weeks has not been as rapid as economists expected. Another disappointment today could hurt the already declining mood.
So it seems investors are finally making a sober assessment of the world economy, with even US market participants realizing that they may have pushed stock prices too high into this economic environment. American technology stocks, in particular, have been flying since the fall of March, driving the Nasdaq near its previous peak. Over the past few days, the sector has stopped going higher and tracking the wider markets.
There is a growing belief among analysts that the huge central bank and government stimulus packages announced due to the COVID-19 pandemic are not enough to offset the bearish factors weighing on the markets. Unemployment has skyrocketed across the globe, and companies are filing for bankruptcies left and right. The worst thing is that there is no way to know when things will return to normal and whether there will be another and subsequent round of infection to contend with. So while central banks and governments are doing everything they can to meet the supply side of the economy, household and corporate demand can nevertheless remain soft for a long time and undermine the economic recovery. Certainly, the chances of a so-called V-shaped recovery look very slim, something many economists agree, even the Fed chairman excludes. Jay Powell yesterday also ruled out negative interest rates, despite Donald Trump being too, and this has also helped weigh up the sentiment.
Negotiations that we may resume low prices in March are still a little premature as far as the big indices are concerned. While certainly possible, traders should focus on what the markets are doing in the short term. Right now, the trend is slowly starting to become bearish again, suggesting that we may see a further weakness in the coming days. However, there is no way to know how far sales can go. And with all the central bank money flying around, even this latest mini dip could be bought despite the precarious economic times we live in. So keep an open mind and trade from one level to the next.
That said, the FTSE looks pretty heavy, and should it break the neckline on this head and shoulder reversal pattern, things could get interesting – definitely for the bears!