Does the USD reaction to US initial jobless point to a next wave down in Equities?

April 07, 2020 16:00

Last week, US initial jobless claims doubled from the prior week, jumping to a new record high of 6.6 million in the week of March 28.

Interestingly enough, the US dollar did not sell-off in expectation of more monetary stimulus from the Fed which went "all in" and pumped its balance sheet to over 5.5 trillion USD, but experienced further gains with the USD Index Future pushing back above 100.00 points.

That could point to some serious trouble ahead, not only for Equity markets, but global financial markets in general.

In fact, the bullish reaction in the US dollar seems to underline the continued risk of a new wave of de-leveraging hitting global financial markets, which should naturally result in high demand for the US dollar given the global USD shortage.

Indeed, this risk is already visible to market participants since the Libor-OIS (Overnight Index Swap) jumped to its highest levels since the Great Financial crisis in 2008, indicating USD funding stress. Or, to make it clear, banks are more and more distrustful of each other, seem to lack confidence that their counterparts will repay their short-term overnight loans.

European stocks after its worst quarter since 2002 with further losses ahead?

If this development gains momentum with the Libor-OIS continuing to rise and global financial markets being hit by a new wave of de-leveraging, the resulting high demand for the US dollar given the global USD shortage, will naturally result in another round of forced liquidations and thus a new wave of aggressive selling in Equities.

So, after European stocks saw their worst quarter since Q3/2002, as the pan-European Stoxx 600 index dropping by 23.03%, while the Spanish IBEX35 dropped by 28.94% (its worst drop in a quarter ever), closely followed by the Italian FTSE MIB dropping by 27.46%, chances of another drop lower in European equities is definitely a given.

This is especially true if the situation with the Coronavirus around the globe, probably especially in the US darkens again, and a lift of the current shutdown with unforeseeable negative consequences for the US and thus global economy materializes again.

How to trade the DAX in this environment?

On an hourly time-frame, the DAX30 CFD is technically neutral between 9,150/200 and 10,150 points, a short-trade could be set up by trading a break out of the range.

A stop could be placed above the high of the range around 10,150 points and the target of such a Short trade would be open, in fact, would we anticipate a break below 8,000 points in the weeks ahead:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Hourly chart (between March 19, 2020, to April 6, 2020). Accessed: April 6, 2020, at 10:00pm GMT

And even if the bulls can avoid such a break lower, especially after the very strong start into the Easter week on Monday, the 6th, and the German index pushes back above 10,000 points, probably even above 11,000 points, trader should be really careful with seeing the German index bottoming out since on a longer time-frame, the DAX30 CFD still trades below the SMA(200) (pink), thus favouring mid-term the Short-side:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between December 19, 2018, to April 6, 2020). Accessed: April 6, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.

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