US equity indices fell at the start of the trading week, triggering sharp moves across financial markets. The Japanese yen and the US dollar acted as safe-haven currencies.
The earnings season started on a strong foot, as all financial services corporations have beaten earnings for the second quarter easily. Also, retail sales in the United States delivered a positive surprise last Friday.
Yet, the US equity markets tanked yesterday. The Dow Jones index fell more than 1,200 points from last Friday’s highs, and the move lower triggered similar reactions on other exchanges.
What next for the world’s equities? Will the second half of the year deliver similar returns as seen in the first six months, or is this the start of a longer correction?
What is Next for World Equity Markets?
The S&P 500 index posted a stellar 15.3% return in the first half of the year. The bullish US equity markets triggered a bullish reaction on equity markets in the developed world. As such, the Stoxx Europe 600 gained 15.2% over the same period, for example.
Equity valuations are high, but the positioning remains bullish. The big question after yesterday’s move is if the decline is the start of a longer-term correction or just an opportunity to buy the dip?
Earnings should represent a tailwind for equities. But if strong earnings fail to support equities on a dip, the spillover to other markets will be significant.
The DAX dropped over 2.5% yesterday. Severe floods and fears of the Delta variant spread explain only part of the move lower. What we saw yesterday was a widespread move lower in European equities, as literally all European indices were in the red.
Moving forward, if the pressure on the US equity markets remains, the European ones are sensitive to bigger declines. They lack technology sectors with high margins, for example.
The bullish momentum in emerging markets stocks was abruptly interrupted by the rise in the US 10-year yields. Should the rise in yields continue, the pressure will likely intensify in the months ahead.
Safe-Haven Currencies in Strong Demand
In times of equity markets weakness during a low interest rate environment, investors look for safety in safe-haven currencies. The US dollar outperformed, as did the Japanese yen. They both gained at the start of the trading week, as investors fled equities.
If the trend continues, US dollar bulls are in for a treat. The dollar was heavily shorted this year, and a short squeeze might follow.