Daily Brief – Warning signals

Warning signals

Admonitions of an equity market correction continue to be unheeded by major benchmarks. A stock market sell-off on Friday as a result of weak non-farm payroll data was met with a familiar buy the dip approach yesterday. Friday’s jobs numbers showed just 73,000 jobs added to the US economy versus the 110,000 forecasted. The US labour market has become an important determinant in many financial markets given the importance placed upon labour statistics by the Federal Reserve. Vulnerability from such data is therefore more than capable of triggering such corrections amongst US assets, including the dollar treasuries and equities as we saw on Friday.

The voices calling for a stock market correction include many Wall Street banks, perhaps most vocally Morgan Stanley and Deutsche Bank. Forecasts for between 10% and 15% corrections within major US indices are commonplace for the quarter ahead. Friday’s non-farm payroll data was not the only disappointing data point to have been delivered in recent sessions. Instead, this data point serves to confirm the emerging bias that the US economy is cooling. Following this data released at 1:30 pm on Friday, both EURUSD and GBPUSD rose by almost 2 cents. 

President Trump controversially dismissed the chief of the bureau of labour statistics, Erika McEntarfer, after a surprisingly weak report sent the market tumbling last month. This move in itself challenges the independence of key institutions integral to the US economy. There is a real concern in markets that Trump’s attempt to capture such typically independent institutions undermines the investability of the US economy. This in turn would threaten the status of the US Dollar as a reserve currency and increase the volatility and put pressure on equity and bond prices. 

Discussion and Analysis by Charles Porter

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