Dollar firm on broad data whilst Stocks continue to suffer

Essential Insights

  • Asian stocks were under pressure as the sell off in US equity counterparts continued for a second day
  • The dollar has moved higher for the third-day in a row, temporary or the start of a new trend?
  • US data comes in mixed but slightly more optimistic

Equities & Dollar
Despite better than expected data , US tech equity shares plunged further as market participants begin to reverse stock prices that are unreasonably high against valuations, fore example in the case of Tesla where real assets around $40 bn however the market cap is $400+ bn. Non farm payrolls came in at 1371.0 k versus the expectations of 1400 k, however relatively speaking this is very close and evidently not something markets were fussed about. The unemployment rate came in significantly better at 8.4% vs expectations of 9.8% , and the labour participation rate has increased to 61.7% vs 61.4%, demonstrating a more resilient labour market.
Losses mounted against big cap companies such as Tesla, Amazon , Apple and Microsoft, dragging down the Nasdaq 100 by almost 10% on the day, whilst the S&P 500 slipped 2% and treasuries rose along with the dollar. The IMF released a warning about this months ago, the fact that equity markets continued rallying strong despite the fundamental weakness.
One thing to note however is that there are signs of slowdown. Even though there was 1.37M jobs added last month, this still accounts from less than half the jobs that have been lost as a result of covid-19. However sectors that have been under particular constraint are recovering, take for example private services employment rose by 984k versus a 43k rise in the goods sector.
The dollar index rose from 92.80 towards 93.22 , however is currently reversing this move as the FED’s inflation targeting initiative and low interest rate environment come back into focus and remain as a ceiling in any real dollar turnaround.
Gold 
Spot gold has reacted rather violently on the day, likely due to the dollars movements. Initially prices spiked up to touch $1950 an ounce, before falling to $1916. What is curious, through my own personal observation, is that the dollar tends to have dropped a lot for gold prices to push up higher whilst if the dollar rises slightly, gold can come off more than 1%. I sense a greater correction is on the table, possible towards the $1860 level, where there remains a large weekly wick.
GBP 
Earlier today the bank of England’s Saunders said that the BOE will be considering additional monetary easing in order to reach its 2% inflation target citing that there are risks on ‘the side of weaker growth and a more persistent inflation overshoot’. Once again the BOE have left the doors open to negative rates and is open to expanding its QE program. Though it will be interesting to see how UK chancellor Sunak will formulate a budget plan around this ‘open view’, more QE just increases government debt further and it may come to a point where gitters such as hiking corporate tax rates become a reality as the government attempts to reduce the UK debt levels

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