Here’s what the Black Friday carnage could mean for stock trading on Monday, analysts say

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The new, rapidly spreading strain of coronavirus B.1.1.529 declared variant of concern by the World Health Organization rocked global markets on Black Friday, raising concerns about how the economy and Wall Street will perform over the coming week, following a sell-off that wiped out November’s gains from the S&P 500 SPX index,
-2.27%
and the Nasdaq Composite COMP,
-2.23%
and sent the Dow Jones Industrial Average DJIA,
-2.53%
the lowest in one day since October 28, 2020.

WHO said the omicron variant, which has been detected in Belgium, Israel and Hong Kong and first identified in southern Africa, is more transmissible than the delta strain which is currently dominant. in the world and other variants.

The emergence of the new strain led to the White House announcement of restrictions, starting Monday, on travel by non-US citizens and residents of South Africa, as well as Botswana, Zimbabwe, Namibia, Lesotho, Eswatini, Mozambique and Malawi, joining the European Union, the United Kingdom , Singapore and Japan, which also announced similar travel bans.

The market liquidation during the abbreviated Black Friday session and the proportional flight to assets that investors believe will perform best amid new mobility restrictions helped overshadow the usual focus on retail , a day associated with heavy consumer spending before the Christmas holidays. Friday’s slowdown was also a clear reminder that the trajectory of the market and the economy depends on how COVID unfolds.

What is not clear is whether the latest development of the coronavirus will lastingly harm the complexion of the market. Omicron comes at a fragile time for bullish investors, with bears pointing to high stock valuations, inflation concerns and global economic growth as reasons to expect stocks that have managed to stave off a decline. decrease from a peak of more than 5%.

In theory, the post-Thanksgiving environment on Friday has traditionally been lightly traded and therefore more susceptible to disproportionate price swings.

The Nasdaq posted its lowest volume of the year on Black Friday, with 3.479 billion shares traded, well below the year-to-date average of 5.099 billion. The total composite volume, including trades on Intercontinental Exchange ICE,
-1.96%
NYSE platforms owned by the NYSE were worth 8.760 billion, compared to an annual average of 11.196 billion, according to Dow Jones Market Data.

Still, only time will tell if the reaction to the omicron is a textbook, an instinctive sell, or something more sinister.

Bill Watts of MarketWatch wrote, citing Friday research by Mark Arbeter of Arbeter Investments, that the next level of support to watch for the S&P 500 after closing at 4,594,62 on Friday is 4,570, the exponential average of 50. days ; 4,566, the 38.2% retracement of the rally; and 4,550, a previous record from early September.

“It’s too early to know how much the new variant will affect economies and markets, and Friday’s market moves were likely exacerbated by the reduction in liquidity due to the Thanksgiving holiday in the United States and the risk that more bad news emerges over the weekend, “wrote Jonas Goltermann, senior markets economist at Capital Economics, in a research note on Friday.

JC Parets of the All Star Charts blog writes that things could get risky if the S&P 500 drops below 4,500, with little support below that point.

“You know how parents always tell you that nothing good ever happens after midnight?” Well, in the S&P 500, nothing good happens below 4,500, ”he wrote in a Friday blog post.

All star maps


“If we’re below that, there’s probably a much bigger problem, and the heaviest 18-month cash positions would be justified,” Parets writes.

Some analysts say there are legitimate grounds for public health unease.

“The fact that this variant appears to be spreading much faster than previous versions (including the Delta variant) deserves very careful monitoring,” wrote Michael Strobaek, global director of investments at Credit Suisse, in a research note. There are a few questions about the effectiveness of Pfizer PFE’s existing COVID vaccines,
+ 6.11%
and Moderna mRNA,
+ 20.57%
due to the number of mutations that the omicron variant carries on the spike protein. The spike protein is the part of the virus targeted by COVID-19 vaccines.

Jefferies analyst led by analyst Sean Darby notes that risk appetite was already on the decline before Black Friday and that the massive sell-off may have been a “tipping point” in favor of caution and risk moderation.

“News of a new or not-so-new variant of COVID spreading in southern Africa
seems to have been the tipping point in the change in risk appetite over the past 24 hours, ”the Jefferies analyst wrote.

“However, there has been a drastic shift in risk variables over the past month – a
growing number of ‘deferred cash auctions’, declining scale of the equity market and
the imperceptible change in appetite of US retailers that seems to have gone unnoticed.
The positioning in global equities is one of the most aggressive in US history, ”according to Darby and colleagues.

Jefferies’ research suggests that investors now expect the Federal Reserve, under incoming Chairman Jerome Powell, to step up the pace of cuts in central bank asset purchases, leading to tighter financial conditions that could prove unfavorable to risky assets. Goldman Sachs sees the Fed cut to $ 30 billion per month after cutting $ 15 billion, and is forecasting three key interest rate hikes in 2022, up from two.

“Ultimately, the Sharpe ratio – a measure of return per unit of risk – is
turning point for global equities. We expect the gap between the performance of risky assets and safe-haven assets to narrow, ”Jefferies wrote.

via Jefferies


However, the situation could still prove to be a buying opportunity for daring investors.

Strobaek wrote that “risky assets such as stocks are likely to restore strength, but we would see this as an opportunity in selective and specific areas.”

“At this point, we reiterate our assessment of the last report of the investment committee, namely to keep equities slightly overweight in portfolios and government bonds underweight,” writes the CIO of Credit Suisse.

Citigroup analysts also said that “we would accept any decline,” noting that its bearish checklist does not indicate significant red flags. “Valuations appear stretched, but other factors (credit spreads, fund flows) are not yet particularly wide,” writes Citi, with 7.5 out of 18 red flags being triggered in its measurements of global markets as states United see 9.5 out of 18.

Citi Research


Greg Bassuk, CEO of AXS Investments in Port Chester, NY, said the weekend sale may have resulted in a Black Friday sale for stock investors.

“Black Friday is usually the unofficial kickoff of the annual holiday shopping season. But we believe the real buy is in stocks that are battered by spikes in Covid infection, inflation fears and supply chain issues, but still have strong fundamentals that will boost their gains as they go. that the economy will finally reopen, ”he wrote

That said, some analysts note that lockdowns in Europe and the spread of COVID, even before omicron’s statement, were reasons to be cautious as they will impact the outlook for global growth.

Either way, it looks like some degree of caveat could be in effect next week and could color trade for the remainder of 2021.

Monday’s trading will help determine if the uptrend continues or if a bearish phase is crystallizing.

It will be a week focused on the state of employment, with the November US employment report due at the end of the week and Powell and others offering their final thoughts ahead of a blackout period. media starting before the last Federal Open Market Committee meeting in 2021 on December 14-15.

See: Fed inflation concerns at last meeting left room for faster reduction in bond purchases

Father Christmas rally, are you interested?

What’s on the economic calendar?

On Monday

A report on pending home sales at 10 a.m. EST

Tuesday

  • S&P Case-Shiller House Price Index for September at 9 a.m.

  • Chicago Purchasing Managers Index for November at 9:45 a.m.

  • Consumer Confidence Index for November at 10 a.m.

Wednesday

  • ADP employment report from November at 8:15 a.m.

  • Final reading of the IHS Markit purchasing managers index at 9.45 a.m.

  • ISM manufacturing index from November at 10 a.m.

  • Construction expenses for October at 10 a.m.

  • Beige Book at 2 p.m.

Thursday

Weekly report of jobless claims for the period ended November 27 at 8:30 a.m.

Friday

  • November 8:30 a.m. non-farm payroll report

  • IHS Markit non-manufacturing reading for November at 9.45 a.m.

  • ISM services report for November at 10 a.m.

  • Factory orders from October at 10 a.m.

  • Basic capital equipment orders updated for October at 10 a.m.

Fed speakers

On Monday

  • President of the Fed Jerome Powell delivers the keynote address at 3:05 pm ET at the “Introducing the New York Innovation Center” event.

  • Govt. Michelle bowman speaks at a virtual symposium on indigenous economies hosted by the Bank of Canada, the Tulo Center of Indigenous Economics and the Reserve Bank of New Zealand at 5:05 p.m.

Tuesday

  • Powell testifies before US Senate Banking Committee at 10 a.m., with Secretary of the Treasury Janet Yellen, on the state of the US economy amid the COVID pandemic under the Cares Act.

  • Outgoing Vice President of the Fed Richard clarida speaks at 1 p.m. at an event hosted by the Federal Bank of Cleveland.

Wednesday

Outgoing Fed Governor. Randal Quarles offer farewell thoughts to an American Enterprise Institute at 11 a.m.


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