The Ugly Sell-off Is Set To Continue

The Ugly Sell-off Is Set To Continue

Stock futures are trading sharply lower today, and traders are really picking up the momentum from Asia, where we saw a heavy sell-off. It seems like traders and investors aren’t listening to official policymakers, and they have set their minds on one thing: interest rates will increase sooner than later.

The fear about the rise in interest rates is that that they are likely to choke off the economic recovery. Traders believe that the current coronavirus vaccination process has the ability to stop the pandemic, and the economic data has shown more resilience than many have thought.

Thus, for these reasons, central banks will start to increase interest rates. However, the Federal Reserve Chairman tried his best during his two-day testimony to emit the message that the Fed members think that the time to increase the interest rate isn’t at hand as the economic recovery is still immensely fragile and it can go off the track fairly rapidly. 

Another reality about the stock market is also that the massive stock rally that we have experienced so far seems to have run out of steam. It appears that traders just do not know what to do with the current stock rally, and the fact is that all of the good news, such as the coronavirus vaccination and a strong possibility of another stimulus package from the US, are failing to stimulate the optimism.

Remember that the stock market has been addicted to stimulus and monetary policy news, and it seems like both of these addictions aren’t producing the same kind of charm which they once did. 

The fact is that so far, we have seen sector rotation where the money started to leave the tech sector, and investors were deploying that capital in sectors such as the airlines, hotels, cruises, and other tourism-related stocks.

We also saw the energy and banking sectors surging as well. However, yesterday’s sell-off was immensely uniform—meaning we saw all the three major US stock indices retracing from their highs at a sharp speed. 

There is no doubt that an increase in the interest rates could create a major problem, but the reality is that traders should not be worried about this too much because interest rates aren’t going to be sitting at their current levels forever.

The main thing that traders need to keep an eye on is how corporate earnings are coming and the outlook. As long as the corporate outlook is strong, we should not worry about the rise in the interest rate.

However, suppose the fear is that economic conditions will rapidly become worse when governments start pulling back from their support, such as the job support programme and other coronavirus-related matters. In that case, the sell-off that we see in the stock market is only a beginning. 

In terms of safe-haven assets, Bitcoin and Gold prices have both failed to show any kind of resilience. The sell-off has been very much uniform, and traders aren’t interested in risk-off assets yet. Both Bitcoin and gold prices broke below their psychological support levels; for Bitcoin, it was 50K, and for Gold, it was 1,800.