- Stock markets tank as investors dump their tech darlings
- Yet, there is no sense of panic in the market, especially among currencies
- US jobs report today might decide if this correction still has some mileage in it
Risk aversion makes a rare appearance
After cruising higher without any significant corrections for three months now, the US equity market finally suffered a meaningful setback on Thursday. The S&P 500 lost 3.5% and the Nasdaq was down 5% as investors dumped tech darlings like Apple (-8%) that have been powering this mystical rally all along. There was no single catalyst to blame, other than the increasingly unrealistic valuations in the tech sector setting the stage for an eventual reality check.
As bad as it seems that the market can drop so much without any news, it is important not to lose sight of the bigger picture. Both the S&P and the Nasdaq are now simply back at the levels they were trading in the middle of last week, so investors are not exactly panicking either.
In fact, a mild correction after such an unstoppable run higher may even be cathartic for the overall rally. It could shake out ‘weaker hands’ in the market and momentum-chasing strategies that were simply piling in for short-term gains, allowing for a healthier march higher later that does not rely on momentum feedback loops.
No panic, especially in FX
For all the risk aversion in equities, the currency market barely felt the reverberations. Defensive plays such as the franc and the yen did gain some ground while commodity-sensitive currencies like the aussie and loonie retreated, but all these moves were modest in size.
The dollar barely managed to score any gains despite the sour mood, which is a bad look. If the world’s reserve currency cannot shine even amidst a genuine risk-off episode, it is difficult to see how it can mount any sustainable recovery, especially now that the Fed has convinced markets that inflation is on the horizon.
Nerves have calmed on Friday, with most currency pairs trading in tiny ranges while futures point to a flat open on Wall Street. Overall, there is no sense that we are staring into the abyss like back in March or even June, though whether this correction still has some mileage in it might depend mostly on the US employment data later today.
Nonfarm payrolls: An asymmetric event?
The US economy is forecast to have recovered another 1.4 million jobs in August, which would push the unemployment rate down to 9.8%, from 10.2% previously. This data set will capture the mid-July to mid-August period, when several states rolled back their reopening plans and crucial jobless benefits expired, so investors will be on edge to find out whether this held back the labor market.
As for the reaction, the risks surrounding the dollar and stocks from this data set seem asymmetric, with a potential disappointment generating a bigger negative reaction than the corresponding upside one in case of stronger numbers.
Markets are already working with the assumption that the recovery is progressing well, so a mere confirmation of that might push the dollar and equities higher, but only modestly. The Fed will not be raising interest rates anytime soon even in case of stellar data, and stock markets are already priced for perfection. On the flipside, a disappointment could shatter this cheerful narrative and ignite sharper moves lower.
In the big picture, US employment reports are more of an intraday volatility event nowadays, not something that generates lasting trends. Hence, this data set is unlikely to change the broader ‘dollar-hating, stock-loving’ trend at play.
Finally, Canada will also see the release of its own jobs data for August, and the ECB’s chief economist speaks at 15:00 GMT. Any comments on the euro will be closely watched.