It is said that stock markets go upstairs and down escalators. This much is true of the current sell-off as 2018’s carefully fought gains are reversing in three brutal sessions. The S&P 500 is now negative for the year, with the Down Jones dropping over 1,000 points since last week’s high. There are many potential catalysts for this, but the most likely explanation is that markets have been running hot for too long and were due a correction.
Friday’s higher than expected wage growth sparked fears of higher inflation and therefore higher interest rates in the US. The dollar has rallied hard while other currencies falter. Dollar pairs are well off recent highs, with the AUD/USD continuing its poor run that started on the 29th. The GBP/USD has experienced its worse two day fall of 2018 to date, with small gains this morning. The euro is holding up relatively well by contrast. The EUR/GBP is slipping back slightly after three days of gains.
Despite the strong dollar, the USD/JPY has hit reverse mode as money flows from the dollar into the perceived safety of the yen. The GBP/JPY is the worse performer on the week, falling over 2%.
Gold has climbed as investors seek our safe havens, while oil prices reverse.
Today, we have German Buba president Weidmann speaking at 09.00.
Canadian trade balance is at 13.30. Ivey PMI follows at 15.00.
Will we bounce or continue to slide from here? In the short term, we could see some extreme volatility in both directs, but in the medium term we may well have seen a medium term top in world markets given their over valuation.
The AUD/JPY is the most sensitive to these moves, with further downside on the cards.