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Behind the markets
It’s apt that Amazon.com Inc. should be at the heart of turmoil spreading across stock markets given what a jungle they’ve become.
“Global markets appear to have started Q2 on the wrong foot,” said Johanna Chua of Citigroup Inc., citing “pressure on U.S. technology stocks amidst lingering concerns of an escalation of the U.S.-China trade skirmish.”
Indeed, fears of a heightened trade war and possible regulation of tech companies sparked an untamed day of trading Monday, with other markets following suit today before settling down.
Here’s what’s going on, and why:
So far today: It’s a jungle out there
“The mood remains decidedly bearish, and there is certainly no shortage of reasons to be fearful,” said IG chief market analyst Chris Beauchamp.
“It’s times like this when investors face a choice - whether to sit and await developments or plunge back in, following Buffett’s declaration that it is good to be greedy when others are not,” he added.
“So far, there seems little reason to expect a turnaround in sentiment, but the irrational exuberance of early January and the host of overbought indicators have been replaced with a growing sense of fear and signs that a near-term bottom is close by.”
We’ve seen these scenes before recently, with big dips followed by rebounds. So the day is young where markets are concerned.
Tokyo’s Nikkei lost 0.5 per cent, and the Shanghai composite 0.8 per cent, though Hong Kong’s Hang Seng gained 0.2 per cent.
In Europe, whose markets were closed Monday, stocks settled down after an initial slump.
Here’s how North America looks:
“The breach of some key technical levels in U.S. markets are source of concern,” London Capital Group said.
“The S&P 500 fell below its 200-day moving average for the first time since 2016. Major benchmarks in Europe are already below their respective 200 DMAs.”
Tech stocks: Jungle Rock
The so-called FANG stocks of Facebook, Amazon.com, Netflix and Google parent Alphabet have been suffering amid the data misuse scandal and President Donald Trump’s attack on the online retailing giant.
“President Trump gave with one hand and is now taking away with another,” said CMC Markets analyst David Madden.
“At the beginning of the year, U.S. stock markets reached fresh record highs on the back of Trump’s tax initiative, but now his trade war and attacks on Amazon are sending investors running scared.”
Trade fears: Bungle in the jungle
Beijing has responded to American tariffs with some of its own, on about US$3-billion in U.S. products.
“In the grand scheme of things, China’s response hasn’t been too aggressive, but dealers fear we could be starting a long trade war,” said CMC’s Mr. Madden.
“The ball is now in Trump’s court, and traders are waiting for the U.S. president to make the next move.”
Some observers believe Washington and Beijing will settle their differences in the end, but at this point each has fired a salvo.
“China has to show it is serious,” said London Capital Group.
“We still expect a settlement in trade negotiations between the two nations. Sentiment will be fragile until the result of trade negotiations become clear.”
There may be a silver lining here for Canada, however.
As The Globe and Mail’s Adrian Morrow reports, the U.S. is now pushing Canada and Mexico to quickly finish negotiations for a new North American free-trade agreement so it can get on with its fight with China.
Amazon.com: Law of the jungle
An interesting one, this.
Mr. Trump has been attacking the online retailer over how much it pays in taxes, and went after the company again Monday.
“The online retailer has been one of the best performers in its industry in recent years, and its recent sell-off has weighed on the sector as a whole,” Mr. Madden said.
Of course, there’s an added dimension here in that Amazon.com chief Jeff Bezos also owns The Washington Post, which “has been critical of the Trump administration,” Mr. Madden added.
“It is possible the pressure Amazon is coming under is due to the politics of its CEO, but while it remains on Mr. Trump’s radar it is likely investors will steer clear of the stock.”
What’s next: The lion sleeps tonight?
Many observers note that the U.S. expansion and the bull market have run for some time yet, and all good things must come to an end at some point.
“There’s nothing in the economic data right now to suggest concern yet beyond the unwinding of what was very bullish sentiment coming into 2018,” said Bank of Montreal senior economist Robert Kavcic.
“But, we’re also mindful that we are late in the cycle by many measures and, at some point, stocks will be looking six to 12 months ahead of the economic data and start to see something.”
Chief economist David Rosenberg isn’t sure we’ve seen the bottom just yet, despite today’s better tone.
“I am skeptical that we are out of the woods just yet,” he said in a note to clients.
To date, he noted, we’re in “a typical correction premised on a compression of the [price/earnings] multiple from its lofty level, but there’s still more to come.
“We have a full multiple point to go, which means that just getting to what is normal at a correction trough would be close to 2,400 on the S&P 500, or about another 170 points down from here,” he said.
U.S. indicators have waned of late, and the next big measure comes Friday with a look at the labour market.
“We will probably spend all week watching U.S. equities, and waiting for U.S. labour market data on Friday,” said Kit Juckes of Société Générale.
“But we wouldn’t be surprised to see the focus shift ever so slowly back to the strength of the U.S. economy.”
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