The S&P 500 fell below its 50-day moving average of 2,085.02 closing at 2081.18 and the Dow dipped below its 50-day moving average at 17826.30 when the markets closed on Friday. Although news of changedregulations in China (expanding the list of shares from 900 to 1,100 which permit short selling and greater intervention in the OTC markets) and increased uncertainty around Greece defaulting on its obligations to the IMF dominated the headlines the overall global economy seems plagued by the weak commodities market perhaps symptomatic of the underlying structural weakness.
Market correction has been a much debated topic and with as the strengthening dollar weakens earnings and higher likelihood of rate hike corrects valuations, the markets might be ready for the correction that analysts have been talking about for a while now. Energy companies will clearly dominate the season as lower energy prices have only been partially priced in. With construction of rigs slowing down ripple effects will be felt in different sectors such as housing and construction.
As FED seemed poised for a rate hike in September the IMF warns the global economy of ‘taper tantrums’ in form of spill overs in the emerging countries. This is of particular concern since relatively stronger demand prospects have been the saving grace as multinationals like Nestle and Unilever attributing large revenue shares (60% and 45% respectively) to emerging markets.
The first round of reports from the financial sector so far (12 companies accounting for 37.4% of market capitalization in this sector) seem upbeat surpassing earnings by 27% from last year with modest revenue increases of 0.6%.
Although rate hike in the US – the first time in the past nine years will be only a signal towards a trajectory leading to a ‘significant rise’ in the all-important federal funds rate will play an important role in market correction along with the internalization of lower oil prices and quantity wars among the oil producing nations.
So what are your thoughts on market correction and impending earnings reports?
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