Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 22 March 2017 at 9:30 GMT

Equities correction could stretch out to 10% — #SaxoStrats

Head of Equity Strategy / Saxo Bank
  • Fading conviction in reflation trade has seen about-turn in global equities
  • Correction could easily see 5-10% fall as part of healthy technical adjustment
  • Oil effect on inflation expected to turn negative by June
  • S&P 500 faces key support at 2,300 and 2,250

 Trump sizing up the chances of keeping the reflation trade on track? Photo: Gage Skidmore

By Peter Garnry

So much of the narrative has revolved around US president Donald Trump since his election on November 8 but the conviction in the reflation trade faded abruptly in the last US session with the S&P 500 declining more than 1% for the first time since October.

So what are we to make of all of this? Where do we go from here? Here is our assessment… 
Global equities could easily fall 5-10% in what would be a normal healthy technical correction. and the selloff will be driven by cyclicals: financials, materials, consumer discretionary - a big question mark here is whether technology stocks will hold the line.

We see further upside in volatility as markets are now constructing a new narrative that essentially centres on the likelihood that the pro-growth Trump policies or set for a bumpy 
road with many road blocks .

Credit growth has stalled lately and the energy impulse into inflation is gone by June.

Oil inflation expect to be gone by June
Source: Bloomberg, Saxo Bank

it seems the reflation trade is massively under pressure here. Especially US financials should reprice significantly if this new narrative unfolds.

Credit growth stalling putting the reflation trade under massive pressure
Source: Haver, UBS estimates

The S&P 500 key level at 2,350 is gone and the next resistance level is likely at 2,300. If that doesn’t hold then 2,250 is next big level.

S&P 500 next resistance at 2,300
 Source: SaxoTraderGO

S&P 500 futures step over the 1% slide mark for the first time in months
 Source: Bloomberg, Saxo Bank

The Nikkei has also broken down and is close to the important 18,700 level – watch volatility and JPY. If they continue higher, Nikkei's downside move could extend further.
Dax still looks the best with Hang Seng, but the German standard bearer is now at key short-term levels – the big support is likely at 11,550 .

We remain very negative on the energy sector, so nothing has changed here .

When volatility spikes higher quality stocks are usually bid relative to other segments of the market. As we like European equities more we believe investors should increase exposure to quality names in Europe. You can get some inspirational names from our Equity Radar.

 Source: SaxoTraderGO

— Edited by Martin O'Rourke

Peter Garnry is Saxo Bank's head of equities strategy.
Market Predator Market Predator
Very nice!
Erik Doom Erik Doom
Hi Peter, do you see a time horizon to reach 2300 , 2250?
Georgio Stoev Georgio Stoev
Better buy that insurance, beforehand. SPX/ES options


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