Global stocks continued to fall steeply on Monday after the trading week started with new lack luster sessions in Asia. Shares declined heavily in Europe and Dow Jones Industrial lost 0.94% adding to the 2% fall last week. Materials, industrials and financial stocks led by Bank of America ended in deep red, negative territory.
The technology heavy Nasdaq declined 1.04%. Equity markets regained some ground in the last half of the session, but the onslaught on stocks seems to be by no way over. Most of the gains after the last half years stock rally have been wiped out after the US Federal Reserve, FED, last Wednesday announced an end to the FED bond buying program of USD 85 billion monthly.
This monetary easing program has given stock markets added liquidity and taken them to new record highs. Capital has been pumped into the more risky emerging markets, which also have seen successful bond issues by in weak economies as Rwanda and Honduras. FED’s announcement has created panic like reactions and led to a flow of capital out of emerging markets and big declines in their currencies.
The last four days developments have grossly strengthened the USD. The DXY-index, a basket of currencies weighed against the Dollar, is at its highest level since June last year. A more optimistic business outlook from Germany has kept EUR/USD steady above 1.31. A decline below 1.3072 will, however, imply a strong bearish signal.
USD/JPY has also kept steady over the last 24 hours trading just below 98 Yen to a Dollar. The Australian Dollar has recovered 0.5% from the 33 month low following the bad financial news from China yesterday morning. The Aussie Dollar is extremely volatile to any changes in China. Precious metals continue to be under strong pressure set for new lows. The same goes for oil in spite of the tense situation in the Middle East.
Robust US retail sales and a drop in the weekly jobless benefits claims had a positive impact on global stock markets yesterday and this morning. Japan’s Nikkei jumped 1.9 % recovering some of the sharp losses the last two weeks. This followed a strong session in New York. Dow Jones passed the 15 000 mark again, adding 1.21 %. The technology heavy Nasdaq index gained 1.32 %. The Asian Pacific MSCI-index rose 1.4 %. Also Chinese shares recovered.
Volatility is still high in the currency markets. Better than expected economic data calmed global markets,after the last few days bruising sell off. Investors remained, however, nervous ahead of next week’s Federal Reserve, FED, policy meeting on June the 18th-19th. The Dollar lost at one point more than 1% from early gains against the Yen, and stands at a four-month low against a basket of major currencies, DXY. USD/JPY is hovering below 95 at 94.92 Yen to a Dollar. Euro/USD is at 1.3349.
The positive data yesterday appeared to have brought some temporary relief to markets rocked by speculation on whether FED is going to taper its monetary easing. The strong rally in global equity markets over the last half year, has been driven by FED’s bond buying scheme. There is an open question as to how the stock markets would be affected by a discontinuation in monetary easing, which other central banks have also copied. Currencies are most likely going to continue to be volatile until stability returns to equities.
Yen short and Dollar long positions have been built up to excessive levels over the last few weeks, and have contributed to the volatility in USD/JPY. Selling of the Yen was overdone and it seems that the latest market turbulence might have filtered out much of that excess. USD/JPY at 95 seems to be reasonable for now. The British Pound Sterling, GBP, is gaining ground against the USD, trading above 1.57. Oil prices are up on US- growth expectations triggered by the latest data. US crude futures stand at 96.70 and Brent trades at USD 104.73 a barrel.