How Will Traders Respond to Dip in US Stocks?

Buy the Dip Mentality Put to the Test on Thursday

US futures are coming under a little pressure on Thursday, a day after the Dow closed above 23,000 for the first time ever, in what appears to be some profit taking following an impressive run for stocks.

While there were no major triggers for this morning’s decline, the finger is being pointed at the softer Chinese economic data and unrest in Spain, where the government announced its intention to trigger article 155 and suspend Catalonia’s autonomy. While neither of these are reason for traders to be bearish stocks right now, it has been pounced upon as reason to take some money off the table and await further opportunities.

The situation in Spain is having a greater impact on the wider European markets, particularly in the IBEX which is down around 1% as investors prepare for more unrest in Catalonia. The euro has been very unresponsive to the developments in Spain so far and the same is true again today, with the single currency trading higher against the dollar, pound and yen. This is clearly seen as being a risk unique to Spain, rather than a problem that could develop elsewhere, although the Italian FTSE MIB has shown some vulnerability to it throughout the process.

It will be interesting to see how US traders respond to the dip at the open. Sentiment has been extremely positive recently, despite the significant amount of political and geopolitical risk lingering beneath the surface. The global growth story is giving people great confidence that the rally has legs to it and earnings for the third quarter of likely to support that.

USD/CAD – Canadian Dollar Unchanged, US Jobless Claims Next

Softer Chinese Data Partially Blamed For Profit Taking

The Chinese economic data released overnight was broadly in line with expectations but did highlight the fact that the economy is slowing a little in the second half of the year. This was widely expected though as the government has reined in spending and focused more on cooling the housing market and reforms. We can expect more of the same in the fourth quarter although as we saw in the third, the improved global economic environment is likely to support the Chinese economy through this transition.

Chinese data is widely viewed as a barometer of global economic activity with the country being the world’s largest trading nation. Trade data has been very strong this year, both exports and imports – particularly the latter – which is a very encouraging sign for the global outlook. As long as this continues, the economy will be less reliant on investment driven growth, enabling the country to focus on a more sustainable model.

Spain to Trigger Suspension of Catalan Autonomy on Saturday

UK Retail Sales Miss Should Be Warning to BoE

In the UK, retail sales wrapped up a week of important economic releases and left us with a bitter taste. Perhaps expectations were too high and a larger decline should have been expected following the strong showing in August but instead the data fell well short of forecasts. The numbers further highlighted what we already know, the UK consumer is feeling the strain of negative real wage growth and this will take its toll on spending. While the inflation and jobs data may be seen as justifying a rate hike from the Bank of England, today’s data should be a warning to policy makers that the economy is not in a good position to take it.

While the focus today is likely to be how US markets respond to early weakness, we will also get some manufacturing and jobless claims data from the world’s largest economy. We’ll also get third quarter earnings reports from 20 S&P 500 companies including Verizon, Paypal and Travelers. Esther George of the Federal Reserve is also scheduled to appear while Chair Janet Yellen is also believed to be meeting with President Donald Trump, who is understood to be making a decision on her successor in the coming days.

Oil Slips Near Highs

In a similar manner to equity markets, oil is seeing some reprieve on Thursday, likely driven by some profit taking as it nears recent highs. A number of bullish factors have fed the rally in recent weeks including an improved global demand outlook, supply disruptions in northern Iraq and on reports that the market is gradually returning to balance even as producers discuss extended production cuts.

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The inventory data from EIA on Wednesday did weigh on Brent on WTI near their highs, despite reporting an expectations beating draw-down for the previous week, something one would typically associate as being bullish. However, with API having reported a larger draw-down the day before, it’s likely that expectations were raised meaning this actually fell a little short.

Economic Calendar

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

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Craig Erlam

Craig Erlam

Former 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.