US: End of stock market correction or dead cat bounce? – ING

In view of Viraj Patel, Research Analyst at ING, global markets are breathing a huge sigh of relief after a late rally in US stocks yesterday helped to engender a tone of stabilisation in the Asia trading session overnight.

Key Quotes

“The number one question investors will be asking themselves now is whether this draws a line under the recent stock market correction or whether this is merely a dead cat bounce. Analysing prior episodes of sharp, unexpected VIX spikes – of which we identified 7 instances since 1990 – it seems that technical ‘flash crashes’ are often followed by a more sustained period of consolidation after the initial sell-off if there are no fundamental (macro or geopolitical) reasons to send stock markets lower again.”

“Given that the current global economic backdrop draws greater parallels to that seen during the August 2015 stock market sell-off – as opposed to say the May 2010 flash crash – one is inclined to tentatively conclude that some respite is likely. However, the US government staying open would certainly help extend any consolidation mode in risky assets – and with President Trump threatening a shutdown if the budget did not include any immigration legislation, it remains highly uncertain whether Congress can strike a deal before the US government runs out of money again on Thursday. The House did pass a stopgap spending bill to extend funding until March 23 – meaning the onus is now on the Senate to make amendments before sending to the White House for final approval.”

“In any case, given the relatively muted contagion effects from the current stock market sell-off to currency markets, we think it is only a matter of time before we revert back to the weak US dollar trend. Indeed, the brief shake-out presents a good buying opportunity for currencies that have performed well year-to-date (namely EUR, GBP & AUD). We also see value in NOK if oil prices rebound.”