A few days ago I wrote about how financial markets often get really quiet over the summer, especially during August when many market participants are away on holiday. Then as September gets underway, there are often some big moves which start a major multi-month direction.
I suppose the example I had in the back of my mind was the summer of 2011. There was a big crisis over the Euro, which had been rising quite strongly against the USD during the first half of that year. All summer it chopped around very erratically within a range. The range really started to break down just as September got underway – and these prices were the highest that we have seen in EUR/USD ever since, I think the total maximum fall was something like 4,500 pips, which is a lot!
It is with this example in mind, I think, that many are looking at Friday’s sharp fall in equity markets. Equities continued to fall today. There is much talk of the large move triggering repositioning selling which in turn can have other turbulent effects in the market. One well-known analyst went from long to short of equities last Friday over the course of the same day, without even going through the usual neutral phase in between!
Some of this was triggered by remarks last Friday by one of the more “dovish” members of the FOMC – the body that decides whether or not the Federal Reserve’s interest rate will be raised – made hawkish comments. Many observers have taken this as a sign that the Fed will indeed raise the rate on 21st September. This might be a reason for the sell-off, or at least a reason – one of the reasons.
I still really don’t think that the Fed will raise rates later this month. I think that if these expectations are still floating around on that day and the Fed actually doesn’t raise rates, it is going to send the U.S. Dollar falling by a meaningful (though perhaps not huge) amount, as those expectations are dashed.
There are two other elements worth considering in this fall in equities. Firstly, there has been a long-term bull market, so there is a kind of feeling that it is due to end, especially as the global economy is not exactly having its happiest time. There is a disconnect between how the economy seem to most and the all-time high prices we are seeing in a major U.S. equity index such as the S&P 500.
Secondly, the chart looks shaky. A look at the weekly chart below shows that the price couldn’t really make a new high during all of 2015, and barely got going really during 2016 before giving up its gains. I think the price right now is in a very crucial area: around the resistance during most of 2015.