By Naeem Aslam
Stock futures in Europe and the US are trading sharply lower as traders brace for another brutal day after the US economic data stoked fear about the health of the world’s largest economy.
September generally gives traders and investors a great opportunity to shake things up in their portfolios as stocks decline during this month. Investors must remain vigilant and maintain a comprehensive perspective.
The sell-off, which has been triggered by the US ISM Manufacturing PMI, is only one set of data, and there is nothing new about this as the economic reading has been in contraction territory for some time.
Nikkei under pressure
What is interesting is how global markets are so connected, as traders have literally picked up the momentum from the US and taken things from there over to Asia, where the Nikkei index experienced a strong selloff of over 4%.
Keeping an eye on the situation, things are not deteriorating in the US, but in Asia, the situation is quite different.
The Bank of Japan is facing significant challenges. On the one hand, they are under pressure to adjust their monetary policy to address inflation, but on the other hand, the current position and recent volatility of the Japanese yen have left them unable to take any action.
Given the selloff we have seen for the Nikkei index and its year-to-date performance, investors should continue to be concerned about the Japanese market and have an appropriate risk approach in their portfolio.
Pessimism in Europe
Over in Europe, things are not looking so great, as the pessimism is very much being passed over from Asia to European traders, and a steep selloff is very much expected here as well.
Given the lack of significant changes in earnings, the focus will primarily remain on the economic data, which is significantly better than in the US, with a highly controlled inflation rate and less concerning economic indicators.
Fresh readings of the Spanish, French and German PMI numbers will be released, but there’s no need for concern as these numbers have historically been in the expatriate territory, and the forecast for all countries’ new readings remains consistent with their previous numbers.
While these numbers may lead to some interesting price action, there won’t be any significant surprises.
More fireworks in US, Canada
Speaking of fireworks, they are abundant in both the US and Canada.
For instance, the Canadian dollar is going to be highly volatile as the Bank of Canada will issue its rate statement and there will also be a BOC press conference.
Again, the focus will not solely be on Wednesday’s event, given that the BOC has already priced in a 25 basis point rate cut.
The crucial aspect to consider is the extent of the bank’s future rate cuts, particularly in 2024. Will we see another 50bp rate cut by the end of this year, or will the BOC make more aggressive rate cuts given that inflation is moving in the right direction?
The US 100 saw significant declines on Tuesday as the index plunged over 3% and it is off its all-time high. The questions is, how far this can continue its journey to the downside.
The chart below shows important price levels in terms of support and resistance. In addition, the price is also trading below the 50 and 100-day SMA on the daily time frame, which shows that bears are in control of the price and more sell off is expected
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.
