Stock markets and oil prices run out of bullish momentum

Stock markets are down on both side of the Atlantic, with growth fears hitting Europe hard in particular. Meanwhile oil is also coming under pressure for another day. 

• Dow denied a new record high for now
• European markets deep in the red
• Oil prices down for a third consecutive session

Hopes of a new in-session record high for the Dow have been dashed, with the index moving almost straight down from the opening print. Indices generally are in retreat, after a morning in which European markets had tried to hold relatively steady. But as the day has gone on the trickle of selling has turned into a flood, and points towards a tough end to the week. Bullish momentum in US markets has finally run out, having already dissipated earlier in the week for European stocks, as the usual weaker second-half of July takes over from the often-bullish first half. But more than seasonality is at play here; earnings season arrived with US markets on a high (aside from small caps, which have been lagging for a while), providing a high bar of expectations to beat, and with the number of S&P 500 stocks down 10% or more from recent highs rising over the course of the week the signs of today’s turn lower were already there. We should not get ahead of ourselves however; the selloff on Wall Street is relatively contained, but the weakness in Europe tells a different story, and it is the growing crisis in infections that has hurt risk appetite there and will continue to hobble things for the time being, especially with an ECB meeting on the calendar next week that might potentially signal a modestly hawkish shift.

All eyes are on oil as it endures its worst three-day period since the end of May. With positioning so packed towards the long end, well above the 90th percentile, it looks like everyone who wanted to board the oil rally train has already done so. Combine that with a stronger dollar and signs of further output revival and you have the perfect ingredients for a selloff that could well spread to the nervous equity market. The shakeout will only be temporary for both in all probability, but it would at least help to reset markets that have become both too frothy and rather complacent of late.