Hi Everyone,
The stock market finished significantly lower for the second day in a row due to the mounting economic worries and the fear of a second wave of outbreaks in Asia. The Dow was down 517 or 2.2%, to 23,248, the Nasdaq lost 139, or 1.6%, to 8,863, while the S&P 500 fell by 50, or 1.8%, to 2,820. Decliners outnumbered decliners by a more than 9-to-1 ratio on the NYSE, where volume was moderately heavy.
Traders said that bulls suffered a major blow today on the heels of yesterday’s late-day plunge, with the key risk measures all confirming the short-term bearish shift in investor sentiment. As one trader explained, “Small-caps, as measured by the Russell 2000 hit their lowest level in almost three weeks today, while volatility skyrocketed and cyclical issues fell sharply. We might be in for the first major pullback since the March lows, which would be a major test for bulls, given the still very high level of economic uncertainty.”
Fed Chair Jerome Powell played down the chances of negative interest rates in the U.S., in reaction to last week’s historic moves in the Treasury market, saying that the FOMC is not currently considering such policies. On the other hand, he suggested that further fiscal stimulus might be needed to mute the economic impact of the pandemic, which could have long-term adverse effects on growth according to the Fed. Treasury yields declined across the curve despite the Chairman’s words, weighing on the financial sector. However, the dollar bounced back from its intraday lows.
Even though the feared Chinese retaliation has not happened, for now, despite the increasing diplomatic pressure from the Trump Administration, the threat of a tit-for-tat trade skirmish between the two countries is still high. The lack of immediate Chinese reaction fueled a short-lived bounce in risk assets overnight, but according to Chinese sources, Beijing is already preparing some form of punishment for the “anti-China” push. Besides the proposed sanctions due to the human rights abuses against the Uighur minority, Republican Senators have also reportedly proposing an investigation into the possible legal responsibility concerning the pandemic, which would be another blow to the U.S.-China relations.
Compared to its ten-week low from yesterday, the Volatility Index (VIX) closed more than 30% higher today, as a lot of investors scrambled to hedge their positions following the monster post-crash rally. The VIX has been accurately tracking the normalization in financial markets, but it remained above the 25 level in the face of the strong, but rather “narrow” rally. Small-caps and the key breadth measures continue to point to “under-the-hood” troubles, but should those measures improve and the VIX start to show a bullish divergence again, we might get another great buying opportunity in the coming weeks.
As always, have a great evening and stay tuned!!!
Joe
