Global stocks fell today following last week’s upswing as trend-seeking traders waited for the next major move.
Looking forward to this week, all eyes remain on central banks. Federal Reserve Chairman Jerome Powell is set to testify in Congress for two days and the Bank of England is due to announce a potential rate hike.
In the US, markets are quiet with the New York Stock Exchange and the Nasdaq taking a day off to observe Juneteenth, along with the US bond market and other over-the-counter markets. Normal trading resumes Tuesday, but signs from foreign markets suggest that there could be additional pain awaiting US bulls after Friday’s 0.7% S&P retracement.
Hong Kong’s Hang Seng Index is down by 1%, and Japan’s Nikkei 225 has also dropped by 1% after hitting a 33-year high on Friday.
Investors in Asian markets are keeping a close eye on China as its Covid recovery slows down and hopes for additional stimulus continue to fade. The Chinese government discussed potential stimulus measures on Friday, but a lack of clear information has left investors wanting.
Over in Europe, the Stoxx 600 index opened 0.6% lower. Germany’s DAX and France’s CAC both started off down by around 0.5%. The UK’s FTSE 100 slipped 0.4%.
“Today, investors are moving with caution amid concerns about global growth,” said Susannah Streeter, an analyst at Hargreaves Lansdown. She added that investors are worried about interest rates due to stubborn inflation and ongoing concerns about the pace of China’s recovery.
Europe, meanwhile, recently entered a recession even though the US has not. Some analysts believe this could lead to outperformance from US stocks.
“We expect the US to head into a short, two-quarter, recession later this year,” Joachim Klement, head strategist at Liberum Capital, said.
“The US recession is likely to be shallower and shorter than those in Europe and as a result, companies with a larger US revenue exposure will likely outperform companies with more exposure to Europe or the slowing Chinese consumer.”
On the other hand, the S&P is already beating most major European indexes; a case could be made for a sharper contraction in US stocks considering that American equities appear substantially more overbought.
But, until the US officially enters a recession, US stocks could continue to overachieve simply because the alternatives in Asia and Europe seem far worse off in a macro sense.
Keep in mind, however, that US stocks are likely on track to suffer a major short-term correction before a “last gasp” July rally emerges prior to a recession bombshell (and possible Fed rate hike) in August or September.
At that point, global equities – including US stocks – will be tumbling. And bulls probably won’t be happy, even if their US-based holdings are falling slightly less than their European ones.
