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World markets begin the week on the back foot

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By Hussein Sayed, Chief Market Strategist at FXTM

Shares across markets are trading in negative territory early Monday with one exception, as China’s Shanghai Composite traded 2.5% higher after the People’s Bank of China (PBOC) kept their benchmark lending rate unchanged.

Commodities more sensitive to the real economy were also on the backfoot with Oil and Copper both declining slightly in early trade.

EU leaders struggling to agree on their recovery fund, still rising coronavirus infections across several countries and the fear of fiscal packages ending in the US are all factors contributing to shaky investors’ sentiment.

Following a 47% rise in the S&P 500 from March lows, markets need another dose of positive news to keep the rally going, but given the many uncertainties ahead, the risks seem tilted to the downside.

While many investors do not expect a steep correction in equity prices, very few still believe the global economy is heading towards a V-shaped recovery in the second half of this year.

With several states across the US expected to enter a second lockdown, it will require bold fiscal plans to keep the economy afloat. We will probably learn more this week about what packages Congress is preparing, and more importantly how the President perceives them. However, it is essential that some relief measures are passed sooner rather than later to prevent markets from experiencing another bout of extreme volatility.

Most US investment banks reported better-than-expected earnings last week, mainly due to the rise in trading income. This week, the earnings season enters into full swing with companies from almost all sectors due to announce results. Beating earnings per share (EPS) expectations won’t be enough to lift stocks, but guidance for Q3 and full-year will be more significant, similar to what Netflix experienced last week.

Rotation from Tech growth stocks to value-oriented companies has been a key theme recently, however if the sector receives a big hit, I expect this will drag the whole market lower with it. After all, it was expected that Tech companies would be the survivors of the pandemic and if that is no longer the case, I do not see high chances for other sectors in taking the lead.

Earnings, fiscal policies and Covid-19 infections will be the key drivers for markets this week. However, any surprising announcements of vaccine trials will also affect sentiment.

 

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