Stock markets paused growth yesterday, with the dollar gaining support on the downturn and US indices correcting by around 0.1% from their peaks. Declines in Europe ranged from 0.1% in the CAC 40 to 0.3% in the DAX and 0.4% in the FTSE 100.
Pressure on the DAX was triggered by a wave of profit-taking that took away 1.5% from the index after touching the 16,000 level, a significant resistance from where the index rolled back earlier in August. Since Wednesday morning, there have been more buying, with an increase of 0.4%.
Perhaps this profit taking is the reason for the sluggishness of the markets the day before. Often, the stocks rise when the dollar is falling, but the US currency has been very reluctant to retreat in recent days.
The USD index was supported again yesterday on the way down to the 50 SMA, which has been the significant support line of the uptrend of the last three months. The same is true for EURUSD, which the bears did not let the day close significantly above 1.1800, pushing the pair below that level early on Wednesday.
The GBPUSD rebound in previous weeks lost strength on the approach to 1.3800, the area where the 50- and 200-day moving averages crossed, indicating that the bears are in control of the pair.
There are several factors on the USD’s side in the coming days.
Firstly, there is the nervousness of waiting for the NFP on Friday. Strong data has the potential to trigger a wave of buying, cementing expectations that a reduction in balance sheet purchases will be announced as early as September.
Secondly, the US Treasury has noticeably depleted its liquidity supply to $262 billion without the ability to conduct new borrowing. And it intends to bring it to $800 billion in the coming months. During periods of active placements, dollar purchases tend to intensify, pulling liquidity from the riskiest markets.
Third, although the Fed is moving slowly to reduce its crisis-era support, it is several steps ahead of the Bank of Japan, the ECB and the Bank of England, which are further away from policy normalization. And that is significant fundamental support for the US currency.
If we see more profit-taking in the coming days and weeks, it could provide even more support for the USD on the capital flight to safety.
The DAX performance could prove to be the canary in the coal mine, reflecting the increased pull of investors to lock in profits from the impressive gains since the beginning of the year with 22% rise for S&P500, 20% for Nasdaq, 17% for Dow Jones, 15% for DAX 30 and 8% in the FTSE100.
It is likely that with the new month, investors will switch to Asian markets where more upside potential has accumulated after a 5% slump in the Hang Seng since the start of the year and a 2% rise in Shanghai Composite since the beginning of the year.