Stock markets are likely to extend correction

The correction in the stock markets is increasing its depth as stock indices in the United States and Europe lost more than 0.5% on Monday. However, other markets turned to be unexpectedly stable. Brent crude prices jumped by more than 2.5%, gold prices gained more than 1.7% and returned in the wide trading range of $1800-1880 per troy ounce. The U.S. Dollar is slightly down despite a general rule that the Greenback should strengthen when stock markets are falling.

So, we may witness asynchronous moves of different markets or investors do not believe the correction would sustain. However, we believe the correction may even accelerate this week with S&P broad market index to tumble by 3-5% amid slowing down U.S. economy for the sixth consecutive week signals, rising inflation expectations and swelling Treasuries yields. Technical picture is also flagging a correction in the stock market.

Besides, there are no positive news this week that could reverse market sentiment. Jerome Powell could hardly improve investors’ sentiment over inflation that is far beyond forecasts and a target trajectory. Although he would certainly try to convince markets that the current inflation spike is just temporary. But, facts are stubborn things, and macroeconomic indicators are against the Federal Reserve dovish rhetoric. More over, GDP Price index in the fourth quarter of 2020 is expected to accelerate to 2.0% from 1.9% a quarter earlier.

So, the Federal Reserve and U.S. Government should deliver something extraordinary and fast to avoid negative scenario for the American stock market. At this point targets for S&P 500 broad market index at 3810 points and further at 3750 and 3700 points remain intact. All these targets may be reached within this week.

Oil market is struggling to avoid any reversal and possible further decline. Brent crude prices has almost returned to last week highs at $65 a barrel without any particular reason. Global economy is slowing down for the last six weeks, slowing down the demand for crude. So, we may consider any levels close to the $65 a barrel as a good selling option with targets at $62.3, $61.4 and $60.7.

Gold is trying to entrench itself above $1800 per troy ounce. But Treasuries Yields are still rising with another this year highs at 1.393% for 10-year benchmark Treasuries. So, a negative pressure on gold prices is retaining.

The U.S. Dollar refuses to strengthen even with rising risks in the stock market. The Euro is struggling to hold above the support level at 1.21200 and would likely to succeed in defending it this week. The nearest resistance at 1.23000 would be interesting for opening sell positions in the EURUSD.

The British Pound is rising amid expectations of lockdown lifting in the United Kingdom. We may expect the Cable has priced in such expectations but we may see a minor upside spike to 1.41000 where the nearest resistance is located. A sell position at this level with targets at 1.37800 and 1.26900 would be an interesting option.

The Japanese Yen slid beyond 105.20 level, which is crucial for USDJPY. Any further decline in the stock market would increase the demand for Yen as a safe haven asset and may lead to a decline in the pair to 104.10.