Market commentary: Are markets back in correction mode?

With equity and bond indices registering one of their worst months in recent years, the hopes for a rebound, after the equity markets plunged during the first 3 weeks of August, seems to be already over. As China continues to fuel concerns over global growth and traders decided to take profits off the table, stocks have resumed their downward trend, erasing the majority of the gains posted last week.

While traders await this week’s US Jobs Report for the month of August, seen by most as a key piece of data to be added to the complex Federal Reserve’s interest rate hike puzzle, China remains the main driver for volatility and the primary negative catalyst for equities and bonds alike.

In fact, with the Chinese Government and Central Bank revising the effectiveness of stock purchases and liquidity injections initiatives that have indeed helped to calm last month’s selloff, but have, so far, failed to revamp the country’s stock market, some analysts are starting to believe that the equity bull market may finally be over. If that was to be the case, the long overdue correction witnessed last month is here to stay, and it could get worse before getting better.

Proving them right is the Shanghai Composite Index, which closed 1.23% lower this morning, after declining 0.82% on Monday, erasing part of the gains fueled by the latest PBOC’s direct intervention. European markets have so far followed suit, declining across the board on Monday, and opening heavily in the red today, with the German Dax, the FTSE 100 (reopening today after being closed yesterday for a UK public holiday) and the French CAC 40 losing between 2% to 2.5% an hour into the trading session.

Moreover, China seems not only to be the primary driver of market volatility, but also to have already started affecting global economic data and currency markets. A direct example is found in the unexpected decline in Japan’s Industrial Production, with data related to July dropping by 0.6%, after increasing 1.1% in June.

Japan, the third world largest economy, recorded a contraction in output due to a slowdown in exports toward China, its main trading partner, and weaker demand from Europe and Australia, the other two major markets, with the electronic and transport equipment industries leading the decline. Although the Yen has so far held on at its current levels, mostly in virtue of its “safe heaven” currency status in times of high volatility, Japanese stocks fell over 5% throughout the past two trading sessions.

With the current market environment giving investors more reasons to sell than to believe in a rebound, the upcoming FED meeting taking place on September 17th will prove to be a key event for traders, as a confirmation of an imminent interest rate hike could very well exacerbate the already elevated volatility, driving stocks to continue their decline.

While a pull back from last week’s gains may offer advantageous entry points for investors that missed the rally, caution would be advisable as downside risk may still end up biting back at buyers too eager to enter the current market.

Disclaimer

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.