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A Healthy Correction

Nasdaq hit yet another all-time high but closed down 2% on the day. Will this accelerate further into a bigger correction?

14 Jul 2020


As of New York Close 13 Jul 2020,


U.S. Dollar Index, -0.11%, 96.55
USDJPY, +0.36%, $107.29
EURUSD, +0.39%, $1.1344
GBPUSD, -0.56%, $1.2551
USDCAD, +0.11%, $1.3608
AUDUSD,-0.17%, $0.6937
NZDUSD, -0.70%, $0.6535


S&P 500, -0.94%, 3,155.22
Dow Jones, +0.04%, 26,085.80
Nasdaq, -2.13%, 10.390.84
Nikkei 225, +2.22%, 22,784.74


Gold Spot, +0.18%, 1802.49
Brent Oil Spot, -2.48%, 42.16


U.S. Treasuries ended the session near their flat lines. The 2-yr yield was flat at 0.16%, and the 10-yr yield increased one basis point to 0.64%. The U.S. Dollar Index decreased 0.1% to 96.54. Dollar was hemmed into narrow ranges against most currencies as renewed concerns about diplomatic tension between the United States and China and rising virus cases put a dent in risk appetite. FX markets remained a sideshow with the equity markets hogging the limelight.

US equity futures started the week strongly by grinding higher from Asian hours till the US session began in earnest. Nasdaq hit yet another all-time high of being up more than 2% and just when it looked like it was going to be a great day for the bulls, prices started to retreat and it soon turned into a rout.

S&P 500 advanced as much as 1.6% on Monday, but a confluence of negative-sounding headlines caused noticeable profit taking in many of the technology-related stocks that left the benchmark index down 0.9% for the session. The Nasdaq Composite fell 2.1% (futures highs of +2.03%, 11,057.50), and Russell 2000 fell 1.3%. The Dow Jones Industrial Average (+0.04%) eked out a fractional gain (futures highs of +2.09%, 26,522).

The day started in rally mode with the FAANG stocks hitting fresh all-time highs and health care stocks outperforming after two COVID-19 vaccine candidates from the Pfizer (PFE 35.21, +1.38, +4.1%) and BioNTech (BNTX 77.78, +7.42, +10.6%) collaboration received fast-track designation from the FDA.

After the S&P 500 topped out at the 3235.28 level at around 1:40 p.m. ET, the Treasury Budget for June revealed a record $864.1 billion deficit, the Los Angeles and San Diego Unified School Districts announced that the new school year will start remotely, and Secretary of State Pompeo confirmed the U.S. will strengthen its policy on China’s territorial claims in the South China Sea.

Losses accelerated, taking the market into negative territory, after California Governor Newsom announced all counties have to re-close indoor operations in several business sectors due to the virus. In addition, the inability of the S&P 500 to stay above its June 8 closing level (3232.39) likely contributed to the downwards momentum.

Shares of Tesla (TSLA 1497.06, -47.59, -3.1%), which were up as much as 16%, turned negative and encouraged profit taking in many of the other mega-cap technology stocks that some say had gotten overbought. Each of the FAANG stocks closed lower.

In other developments, PepsiCo (PEP 134.94, +0.45, +0.3%) beat top and bottom-line estimates; Analog Devices (ADI 117.25, -7.25, -5.8%) issued upside Q3 guidance and agreed to acquire Maxim Integrated (MXIM 69.29, +5.20, +8.1%) for approximately $21 billion in stock; and Macau lifted its quarantine travel restrictions, boosting many of the casino stocks.


China announced “corresponding sanctions” against the United States on Monday after Washington penalised senior Chinese officials over the treatment of minority Uighur Muslims in the western region of Xinjiang.

The sanctions targeted Senators Ted Cruz and Marco Rubio, U.S. Representative Chris Smith, Ambassador at Large for International Religious Freedom Sam Brownback and the U.S. Congressional-Executive Commission on China. Rubio and Cruz have both sponsored legislation that would punish China’s actions in Xinjiang. Smith has also been a vocal critic of China on issues ranging from Xinjiang to Hong Kong and the virus

Washington’s measures against Chinese officials, including the Communist Party secretary of Xinjiang, involve freezing U.S. assets, U.S. travel bans and prohibiting Americans from doing business with them.

COMMENTS/IMPACT: A tit for tat move between the two biggest economies is not good as its reflective that neither party wants to back down and this might reverberate into economic sanctions and sabotage (i.e. U.S. making it hard for Chinese companies to IPO and pressuring funds not to invest in Chinese companies). Any escalation might put pressure on risk assets and this has to be monitored in conjunction with the virus situation, for markets might be spooked if both fronts take a turn for the worse.


HONG KONG: The European Union is preparing countermeasures on China in response to Beijing’s new security law on Hong Kong, the EU’s top diplomat said on Monday, but envoys stressed the likely steps will not amount to economic sanctions. Like much of the West, the EU has denounced the decision by China’s parliament to pass national security legislation for the ex-British colony of Hong Kong despite an international outcry. Finland said it supported the idea of suspending extradition treaties with Hong Kong since the new security law meant detainees could be transferred to mainland China — where courts are controlled by the ruling Communist Party. Earlier on Monday, Sweden publicly endorsed the measures first proposed by France and Germany and also supported by Denmark and the Netherlands.

HUAWEI: Prime Minister Boris Johnson is set to ban Huawei from Britain’s 5G network in a landmark decision that will anger Beijing but win plaudits from Trump as the United States grapples with China’s rising economic and technological clout. It is unclear how far Johnson will go on Tuesday. Telecom firms already had to cap Huawei’s role in 5G at 35% by 2023. Reducing it to zero over an additional two to fours years is now being discussed, although operators have warned that going too fast could delay key technology and disrupt services. Huawei has said the implications of the U.S. sanctions are not yet clear, and it has urged Britain to wait. The Telegraph newspaper said on Friday the government was expected to set a deadline of 2025 for removing Huawei equipment.

Thematic Context: “In an increasingly polarized world caught in a Thucydides trap (US vs China) which could possibly split the world monetary order into two hegemonic zones,

  1. Pro-china aligning with One Belt One Road initiative (commodities priced in RMB) and
  2. Pro-U.S. aligning with Blue Dot Programme (commodities priced in USD)” — 22nd June 2020

COMMENTS/IMPACT: At this point, it seems pretty much of the western world is against China. The dual-hegemony theme we laid out is getting closer by the day (China already has Oil priced in RMB and trading volumes are increasing). This is positive for the RMB (and proxy SGD) in the longer run.


Coronavirus infections rose above 13 million across the world on Monday, according to a Reuters tally, climbing by one million in just five days in a pandemic that has killed more than half a million people. World Health Organization chief Tedros Adhanom Ghebreyesus said there would be no return to the old normal for the foreseeable future, with too many countries headed in the wrong direction.

Thematic Context: “The virus situation is still severe and new strains seem to be developing. A large part of the world is in the midst of battling the 2nd and 3rd waves, the last week of July and first 2 weeks of August will be crucial to watch for mortality rates. Any spikes in mortality rates might spook markets and dampen risk sentiment.” — 13th July 2020

COMMENTS/IMPACT: The virus situation remains fluid, keep an eye on mortality rates and vaccine developments, those will be the main drivers of sentiment in the weeks ahead.


Bank Of Japan

An exhausted toolbox means the BoJ is not hugely compelled to announce any major policy changes on Wednesday, making perhaps some modifications to its emergency lending programs and hoping that the reopening of businesses will be enough to sustain the recovery. The Bank’s quarterly outlook report may provide some clues as to whether additional stimulus is forthcoming in the near future.

But none of that will be particularly relevant for the JPY, as the safe haven currency see-saws while investors make up their minds on how serious the escalation in virus cases is.


OVERALL SENTIMENT: What a night it was. Nasdaq hit yet another all-time high as it climbed more than 2% during the course of the day before tumbling more than 4% from the intraday highs to close down 2% on the day. There was no clear trigger for the moves, but that seems to be the case these days. A correction is healthy, but the question now is will this accelerate further into a bigger correction?

Nothing has changed in the overall picture of unlimited liquidity driving asset prices higher. Gold and Silver were poised to break higher but also got dragged down by the equity correction. The price action will embolden the battered and bruised bears to come out in force soon, but we have seen this movie before.


Stock Indices

Read the day’s Trading Tip here:



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