What's next for global equities after the latest slump?
An estimated $1 trillion in value was wiped from equity bourses this week, with US exchanges hit the hardest
Global equity markets slumped this week after retaliatory tariffs on $60 billion worth of US goods were announced by China on Monday. An estimated $1 trillion in value was wiped from global equity bourses, with US exchanges hit the hardest.
The S&P500 index dropped 2.5 per cent, to its lowest levels in six weeks while the Dow fell more than 600 points. While equities and commodities bore the brunt of the selloffs, the reaction in the currency markets has been far less tepid. Commodity currencies such as the Australian and New Zealand Dollar experienced losses of less than 1 per cent following the announcement.
The global growth story has also hit a bump this year.
Currency markets have generally been weaker with investors ditching risk and piling into the US dollar at the start of the second quarter, which accounts for the rather muted forex moves this week. However, this trade war story has been important throughout 2019 so far, so expect these recent developments to taper risk moods at the start of the summer when the Chinese tariffs kick in on June 1.
The global growth story has also hit a bump this year. The International Monetary Fund's cut in global growth forecast has been flanked by leading economies witnessing their own respective slowdowns. We have seen the US Dollar Index peak at 98.00 levels, which remain our upside target throughout May. Any further escalation of the trade war theme will lend support to Greenback long positions and should see further downsides, particularly in emerging market currencies.
The US data docket has been mixed to say the least: while US jobs trumped expectations by coming in at 263,000, well above the expected 179,000, inflationary pressure still remains with the leading month-on-month US indicator still lagging at 0.1 per cent. Next up is the overall quarter-on-quarter gross domestic product data due out at the end of May. This could potentially give us a hint if the Federal Reserve would consider at least one rate hike in 2019.
After falling to 1.1110 against the US Dollar last month, the euro has come in for some support on the Dubai Gold & Commodities Exchange (DGCX) to trade above 1.12 levels. However, I still see very stiff selling resistance coming in at 1.1250. As long as the EUR/USD has a daily closing below this level, short positions will have nothing to fear. While there has been a test of this level on three occasions over the past trading week, any daily close above and we could be in for a move toward 1.13120 levels for the euro.
DGCX’s Gold contract has been rather lively of late. The precious metal has rallied from 1260 levels up to the current 1300 channel where it currently seems to be finding resistance. While I continue to maintain my bearish bias in gold, look to start triggering short positions above 1320 with another move towards 1268 levels through the summer months. This level represents the convergence of the 100- and 200-week moving averages – and also represents the 50-month moving average. Expect gold to trade in this range with a breakout above 1320 and a break down below 1268 unlikely through the end of the second quarter.
Finally, with the Indian elections coming to a fruition by the end of May – expect things to get lively in Indian markets. After strengthening to 69 levels against the US dollar early this month, the Indian rupee pretty much pared all those gains to depreciate to 70.50 levels. While 71.70 levels seem a little far-fetched at this moment – watch for some rupee strength to come in towards the end of the month as foreign direct Investors begin to reinvest into Indian markets once the political uncertainty clears. Following the May result – I would not be surprised to see the Indian Rupee test 68.20 levels.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti
Updated: May 14, 2019 12:18 PM