Fundamental Comment

Sell off continues, why am I not surprised?


The sell off continued in global equities, led by hefty losses in Wall Street, as well as cryptocurrencies and the forex market, yet analysts should not be astonished by the wiped off trillions.

The Dow Jones Industrial Average reported the biggest one-day drop (in terms of points) on record on Monday, losing 1,175.21 points to end at 24,345.75. The strong sell off erased $1.25 trillion off the US stock market.

Asian shares trailed the losses on Wall Street, where Australia's ASX200 finished the session down 3.2%, erasing around A$60bn from the Australian share market.

In Cryptocurrencies, the bearishness continued, led by the Bitcoin, which is currently trading 24 percent lower at $6,100.

The U.S. dollar resumed its rebound from a three-year low on Monday, as it climbed to a peak of 89.56, according to the dollar index.

Although the negative numbers are terrifying, they seem to be natural after the overvalued rally seen lately, whether in global shares or digital coins.

An ongoing rise and breaking records day after day without a reasonable fundamental backing should end this way.

In fact, a downside correction is healthy for markets, but the steep rise seen in major stock indices would eventually face this harsh fate.  

Someone could claim that major economies are reporting strong growth and companies and posting upbeat profits, yet that does not mean that everything is well and there are no risks to a setback in recovery.

It is important to remember that the record highs in equities over the recent years have been largely driven by the generous money printing by central banks, which, in fact, is considered an artificial growth not a real one.

With many central banks, led by the Federal Reserve, are about to reverse their easing monetary stance, markets are likely to lose their key stimulus.

The Fed is predicted to hike rates three times this year, while both European Central Bank and Bank of Japan could start monetary tightening. Also, the Bank of England is highly anticipated to raise interest rates in May.

In the Crypto world, the overvalued rally in digital coins, was largely expected to face a very strong downside correction, especially in a market that is not regulated and not mature.

Cryptocurrencies are meanwhile facing a fierce war from many Asian countries, as they see them a critical threat to the financial system.

Banks are in real threat of losing their role in money transfer, as digital coins offer cheap and easy way to moving money across continents.

U.S. Treasury Secretary Steven Mnuchin has called for the necessity of discussing the issue of cryptocurrency regulation during the upcoming G20 summit to be held in Argentina in March.

Moving to the forex market, the U.S. dollar could be about to start a late rebound from a three-year low versus a basket of major currencies.

The rebound could be described as late since the Fed was the first to start monetary tightening and has pledged to continue with the same stance this year.

Other central banks, more specifically the ECB and the BOJ, are still far behind the Fed in terms of monetary tightening.

The U.S. economy is also showing strong growth, low unemployment, improvement in wage growth and pick-up in inflation, while the economy should soon take advantage of the tax cut legislation.

The greenback has remained under pressure due to political reasons, specifically the lack of confidence in President Trump’s administration and the huge differences in point of views between Republicans and Democrats.

However, political worries should not have that big impact on the dollar’s movements, where the rising interest rates should boost demand on the greenback.

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