Futures in the United States are trading up while those in Europe are down following the massive sell-off seen in U.S. equity markets on Tuesday. The bears took control and dragged the Dow Jones Industrial Average down nearly 200 points, as stock traders re-examined the outlook for economic growth at a time when the major indices are hovering around record highs.
In yesterday’s session, the Dow Jones Industrial Average dropped 0.76%, and the S & P 500 index fell 0.34%. The Nasdaq, the tech-savvy index, rose 0.07%, and the Russell 2000, the small-cap index, dipped 0.72%.
The possibility of economic growth slowing down, as hinted by a lower labour market report and rising coronavirus cases, amid tapering discussions among central bank officials, is having a major toll on investor confidence. Moreover, isolated hindrances in combatting the spread of the delta variant may likely dampen hopes of a strong global economic rebound and contribute to higher volatility in stock markets. Having said that, equity indices are still near all-time highs and, thanks to effective management by the Biden administration and the Federal Reserve, the repercussions of the pandemic have broadly been contained.
Historically speaking, investors usually witness weaker stock market performance in September. Stock markets have been consistently strong and posting gains, with the S&P 500 up nearly 20% in 2021 without even a 5% retracement. Furthermore, there is a lot of uncertainty related to the expected economic recovery and the expected change in Fed policies. This means that investors should brace themselves for some volatility as markets go through a correction phase.
Today, the Labor Department is set to publish its job openings and labor turnaround data. Going forward, investors should dissect economic reports to understand how economic recovery may be affected by changing macroeconomic dynamics in the near future.
ZEW Economic Sentiment
As per the data released, investor sentiment in Germany has been declining for the last four consecutive months. Investors expect chip shortages and raw material shortages to adversely affect economic growth. As per the report, economic sentiment dropped from 40.4 in August to 26.5 points in September. The expected number was 30.0 points. Moving onwards, economic recovery is expected to improve, as can be seen by the optimistic ZEW index of current conditions. This index jumped to 31.9 in September from 29.3 in August.
The slump in equity markets seeped into the performance of crypto markets as well. Yesterday, crypto traders were in a frenzy after El Salvador officially declared Bitcoin, the gold standard of cryptocurrencies, to be its legal tender. Businesses are required to accept Bitcoin in exchange for goods and services under the country’s new regulations. The government has purchased the digital coin worth $20 million and has placed 200 Bitcoin ATMs across the country to facilitate its citizens.
Rather than having a positive impact on markets, investors were on a selling spree, despite Bitcoin reaching its highest price since May, surpassing $52,000. Yesterday, Bitcoin fell as much as 16% and is currently trading near $46,500, while Ethereum dropped nearly 12%. Similarly, stocks that are positively correlated with cryptocurrencies fell. Coinbase and MicroStrategy both fell nearly 4% and 9%, respectively. Major exchanges reported operational issues, causing transactions to be delayed in the midst of the market meltdown.
Since Monday, oil prices have been falling after Saudi Arabia reduced crude oil prices for Asian countries. Investors believe that the steep price cut is due to a bleak outlook for Asian demand in the coming months. However, China’s strong economic data and supply shortages in the United States have provided some support.
China is the world’s largest oil importer, with crude oil imports growing by nearly 8% in August compared to the same period in July. The figure grew after refiners resumed purchases following the announcement of new import quotas. China also posted a jump in exports last month because of the strong global demand for commodities. If Asian counties can maintain this momentum, the outlook for crude oil will likely be positive in the coming months.
Gold is seeing a retracement in prices following an appreciation of the dollar by 0.5% against other major currencies. On Tuesday, prices fell by nearly 1%. The FOMC is set to meet from September 21 to September 22. This will be a significant event for the precious metal because it will likely provide traders with guidance on the timeline for bond purchase tapering. A hawkish stance would be harmful to the yellow metal because the opportunity cost of holding the asset would rise, reducing the bullion’s appeal.
Technically, gold prices have been unable to break through the critical $1,835 level. As a result, investor confidence has plummeted. Investors should keep a close eye on the European Central Bank’s meeting on Thursday for clues on how the Fed will react in the coming months.