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Stock Market Slump Looking More Like a Healthy Correction

Stock Market Slump Looking More Like a Healthy Correction

2018-02-07 09:15:00
Martin Essex, MSTA, Analyst
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Stock Market Talking Points:

- European stock markets are steadier Wednesday after the global tumble that began on Wall Street Friday.

- While volatility remains high, the latest moves suggest a correction within an uptrend rather than a trend reversal.

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Steadier stock markets in Europe Wednesday are adding to the evidence that the sharp falls that began on Wall Street Friday are part of a healthy correction within the longstanding bull market rather than the start of a new trend downwards.

Shortly after the European open, the FTSE 100 index of leading London shares was up 0.66%, the German DAX was 0.36% higher and the CAC 40 in Paris was 0.32% stronger.

FTSE 100 Index Price Chart, 10-Minute Timeframe (February 2 – February 7, 2018)

Stock Market Slump Looking More Like a Healthy Correction

Chart by IG

Analysts have speculated that the weakness in global stocks reflected fears that US interest rates will rise further and faster than previously expected. However, the CME FedWatch tool is still suggesting that there will be only two or three quarter-point rate increases by December – little changed from previous forecasts.

Moreover, the rout in global bond prices seems to be reversing, with the yield on the benchmark 10-year Treasury note little changed Wednesday. It was the selloff in bonds that arguably triggered the tumble in stocks as traders worried about the possibility of tighter monetary policy worldwide.

Safe havens slip back

Elsewhere, so-called safe havens generally eased back Wednesday as less money flowed into assets seen as less risky. The spot gold price was well down from its late-January highs while the Japanese Yen and the Swiss Franc were more stable after the drops in USDJPY and USDCHF earlier this year.

As for the Australian Dollar, which tends to benefit when traders are willing to take more risks, AUDUSD was relatively steady after its tumble that began late last month. The CBOE volatility index (VIX), seen as the markets’ fear gauge, has slipped back from its earlier highs.

Looking at the rest of the day, much attention is likely to be paid to a series of US monetary policymakers who are due to speak and will likely give the markets a steer on the likely course of US interest rates this year.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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