European and U.S. equity futures are trading modestly higher as bargain hunters have provided some support by stepping in after the massive sell-off that took place yesterday. Equity markets dropped the most in the last 30 days yesterday. Investors are concerned that economic recovery will slow down in the coming months due to a spike in coronavirus cases. The sell-off in Chinese stocks and weak US retail sales numbers isn’t helping the situation either. It is likely that the gains that we are seeing for the US and European markets today may not last long.
Economic Update
Retail sales in the U.S. underperformed projections and dropped at a much faster percentage than had been initially expected. As per the commerce department, retail sales were expected to decrease 0.3% but actually declined 1.1% compared to the same in June. This change shows that consumers are becoming more price-conscious as a result of higher inflation, and they are slowly shifting towards the consumption of more services.
Similarly, the index monitoring the sentiment of homebuilders in the U.S. slumped to its lowest in nearly 13 months. The likely culprits behind the drop are continuing supply bottlenecks and rising costs. On the other hand, factory production showed strength and rose to its highest level in nearly 4 months. However, producers have been finding it harder to fill the empty vacancies and to cater to higher input prices, which are dragging the profit margins of these companies down.
Having said that, investors should note that factors contributing to the strain on these metrics are likely to be short-term, as communicated by the Fed time and time again. Hence, over the next couple of months, as the economy continues to recover, inflation and supply chain issues are likely to dissipate.
The Federal Reserve
The Fed chair, Jerome Powell, spoke during a town hall meeting yesterday but did not remark on monetary policy. He did, however, say that although the central bank is trying its best to control the situation, the tools at his disposal have limitations. He also warned that the coronavirus is likely to stay “for a while” and that it would take some time to achieve the pre-pandemic normal that many Americans so heartedly desire.
Moving forward, stock traders should closely monitor and dissect communication by Fed officials to get hints on when the Fed plans to start its tapering of bond purchases. Investors will be dissecting the FOMC meeting minutes that are scheduled to be released today.
ARK
The selloff in Chinese companies shows how investors are uncertain about what the future holds for these companies. Regulatory crackdowns, slowing economic growth, and a rise in Covid cases have made the situation very bleak. Cathie Wood, the founder and CEO of Ark Invest, stated that the waning relationship between the U.S. and China is bringing more activity to the U.S. Her company has also massively dumped Chinese stocks and the firm’s ARKK ETF now has no exposure to companies in the second largest economy in the world.
Asian Markets
As of 01:04 a.m. EST, the Nikkei rose 0.73% while the Shanghai Composite Index was up 0.56%. The ASX 200 index jumped 0.05% and Seoul’s Kospi hopped 0.96%. The Hang Seng index, in Hong Kong, has risen 0.75%.
Bitcoin
The slump in equity markets has affected crypto markets as well; as a result digital coins are going through a correction in prices. Going forward, the price action of cryptocurrencies is likely to show strength as they have been testing their respective resistance levels over the past few days. A breakthrough of these levels would propel the digital currencies to fly even higher.
Investors should keep in mind that the cryptocurrency industry is undergoing a revolution, and many institutions are working to make the use of these digital assets a reality in the near future. Visa is one of these businesses.
Visa is working hard to connect global electronic payment systems to blockchain technology. As of now, 54 fintech companies have joined Visa in its goal of making it simple for consumers to use digital coins as a means of payment. In 2021, the company’s crypto-connected debit cards assisted in conducting transactions worth nearly $1 billion. This development demonstrates the enormous potential of cryptocurrencies, and as a result, now could be a good time for investors to scoop up some bargains before crypto prices resurge again.
Gold
Because of the coronavirus situation, which is seen as a threat to a quick global economic recovery, gold prices have recovered slightly. A stronger dollar has hampered the precious metal in recent weeks, but events in Afghanistan and weak retail sales reports in the United States have reduced investors’ appetite for risky assets, such as equities. This has helped to support falling gold prices. Traders will scrutinise today’s FOMC minutes to determine when the Fed is likely to raise interest rates, as this would have a negative impact on gold prices in coming months.
