Explosive Situation
Global politics was shaken by the USA’s decision to withdraw from their nuclear arms treaty with Russia. Trump has a history of backing out of or trying to renegotiate international agreements. At first he focused on trade deals, then he left the United Nations Human Rights Council over disagreements concerning their treatment of Israel and finally he pulled out of the 2015 Paris Accords on climate change. These signs indicate that the USA may be trying to redraw the map of the world’s alliances. Due to the alleged threat Russia poses, US nuclear missiles could easily find their way back to Europe, despite having completely left the continent after the Cold War. Once the United Kingdom leaves the European Union, the only member with their own nuclear weapons will be France. Yesterday, Russian President Vladimir Putin announced that Russia won’t hesitate to aim their missiles at all of Europe if any country accepts US nuclear weapons. It appears the nuclear scare of the 90s could make a comeback.
600 Point Minus
The Dow Jones Industrial Average closed yesterday’s trading session with a drop of 608 points, wiping out all of its 2018 gains. The recent Flash Reports were less than stellar and what’s even more concerning is the number of new home sales being at a two year low, which suggests the real estate market is slowing down. The latter could also be considered to be merely an effect of rising interest rates. Either way, the outlook of the mortgage market worsened, resulting in investors selling their banking sector stocks. Companies who released their Flash Reports yesterday could easily see minuses of 5% or more. AT&T declined by 8%, Microsoft by 5.35%, Caterpillar by 5.58% and UPS by 5.52%. Hopefully today’s reports will have a more positive effect on the market. Meanwhile in Asia, Nikkei inherited the US trend and declined 3.72% as did the Australian index by 2.83%. The Shanghai Composite on the other hand had the lowest losses of the trading session, only being 0.28% in the negative. South Korea’s 1.63% drop is also relatively impressive, considering that based on data published earlier today their GDP grew by 2% instead of the expected 2.7%.
EURUSD
Looking at the movements of the euro-dollar pair, it appears the market is in the process of pricing in some kind of surprise they anticipate coming out of today’s European Central Bank (ECB) meeting. The ECB seems unable to move away from its extreme 0% interest rate. Meanwhile in addition to Italy, France also failed to meet the European Union’s budget deficit requirements. The foundation of the EU and the Eurozone has been growing increasingly unstable lately. The countries worried about their independence seem to be resisting the EU’s attempts to centralize and are constantly looking for loopholes or other ways to shirk their responsibilities. It’ll be difficult for the EU to challenge the dollar’s hegemony with their members in such disarray.
Yesterday the EURUSD was already below 1.14, which may be a sign of it preparing for an attempt at breaking its August lows. Earlier this summer the 1.1300 line halted the euro’s weakening and caused it to rebound back to 1.18. The same line also acted as a powerful line of support back in 2017. Price is now only 100 pips away from that level and the movement’s current momentum may be enough to actually reach it. Yesterday it successfully broke the 1.1440 support line, making 1.1370 the primary support line and opening up the path to 1.13. This direction could still potentially change depending on the ECB press release. If the President of the ECB, Mario Draghi, brandishes the possibility of a rate hike, the euro still may regain some of its strength. That said, the members of the central bank aren’t known for spontaneous behavior and are unlikely to cause surprises.
Nasdaq
The Nasdaq has been a popular choice for investors over the past few years. For the longest time the index appeared unaffected by both interest rate hikes and turbulent trade relations. July and onward it set a new record every month including early October. Even so, investors chose to pull out of or reduce their exposure in the tech sector after seeing the results of the latest Flash Report season. The Nasdaq led the charge among rising indices and it was also the first to start falling. There are still two major companies left who could turn the tide today. Alphabet and Amazon are both benchmark companies that make Intel seem small in comparison these days.
It’s important to note how candles indicating large movements tend to end in long wicks. This is usually the result of traders buying the lows. It could be short covering, buying the lows or possibly even both. One thing that became clear is that buying the lows has become typical of how the Nasdaq is being traded. This phenomenon is particularly worth keeping in mind for intraday trading, regardless of the trade’s direction. Yesterday the index fell to 6786, a price last seen around September 5th. If the decline doesn’t continue, this level could be considered the lower limit of the second correction wave. If the sellers become the predominant force on the market once again, the most likely scenario is that the index will stay within the trend channel and possibly decline to 6594 and stop there. A lot of that may depend on the results of the Flash Reports, although the pre-market data suggests today may bring market consolidation.
Sincerely,
Laszlo | Market Analyst
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