US Index Losses May Prove Short-Lived

US Earnings Key on Tuesday

A rare negative session on Monday in US equity markets could be quickly reversed on Tuesday, with futures pointing to a more positive open on Wall Street.

While there is always the potential for market pullbacks or even corrections, I don’t think we can read too much into Monday’s declines, especially given the long and gradual rally that preceded it and the size of the losses registered. I think what we saw Monday was simply some profit taking and now we’ll see just how bullish investors are at the moment by how quickly and aggressively the dips are seized on. Index futures suggest we won’t have to wait very long at all.

As will remain the case for much of the week, the main driver for equity market sentiment will be company earnings today with 42 S&P 500 companies scheduled to report on the third quarter. This includes the likes of Caterpillar, 3M, United Technologies and McDonald’s, all of which are also components of the Dow and three of which will report before the open, which could drive sentiment early in the session. We’ll also get flash services and manufacturing PMI surveys from the US shortly after the open which could help guide sentiment.

EUR/USD – German and Euro Mfg. PMIs Beat Expectations, Euro Unchanged

EUR Edges Higher on Strong PMI Data

The eurozone recovery is gathering momentum according to surveys released this morning, with employment being a particular highlight from the manufacturing and services PMI reports. While the services PMI eased slightly from last month to 54.9 – which still indicates a strong growth outlook – the manufacturing survey was extremely encouraging and was driven by strong export demand.

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EUR Gains Appear Capped Ahead of ECB Decision

While a stronger euro may represent a potential headwind for manufacturing going forward, the ECB is managing the transition very carefully and has repeatedly acted to prevent a damaging appreciation. The ECB is due to meet on Thursday, after which an update should lay out plans for bond buying beyond the end of this year when the current program will expire. While a reduction appears all-but guaranteed, the manner of the scaling down of QE is still apparently being decided on, with an initial €30 billion reduction until next September the most heavily speculation option.

The ECB will likely avoid to committing to anything beyond September – making this tapering process different to that carried out by the Federal Reserve – instead giving the impression that the decision will be made closer to the time, even if the process has already largely been agreed on. With this in mind, it’s hard to envisage a scenario in which the ECB intentionally delivers above what markets are expecting, which could weigh on the euro driven by either profit taking or the usual dovish accompanying commentary.

Investors Look for Guidance

JPY Weighed Down By Abenomics Vote of Confidence

The yen is once again trading under a little pressure on Tuesday, having recovered late in the session on Monday to end a little higher on the day. Perhaps this is a reflection of the fact that the result was broadly priced in, as was the continuation of monetary easing regardless of the super majority.

It’s also possible that, having fallen so far over the last couple of months, it sell-off has become overextended in the near term and a natural correction is on the cards. Maybe the election result has triggered such a move. The inability of the dollar, pound and euro to break yesterday’s high may be evidence of this.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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