European markets are trading lower this morning tracking the losses which pushed the Dow Jones index lower by triple digit last night. Traders only love the equity markets when all the major indices are trading in the same direction as this makes them more comfortable with the risk that they are preparing to take. On the flip side, when one of the major index is making a record high while the rest of them lack luster, this confirms that something is out of whack and it is not the best opportunity. This is exactly what was taking place on Wall Street, where the NASDAQ index was making record highs, but Russell and the Dow Jones were both well shy off of their record highs and not necessarily closing in the positive territory either. Thus, alarm bells started to ring for investor that soon these markets will synchronise and there will be a correction.
One can always blame the current sell off due to the strength of the U.S. dollar, which is impacting the earnings of bigger firms. However, surely these firms do have the wisdom of hedging their forex risk and this should not be a major problem. Apple, announced their earnings last night and it wasn’t something which many were expecting. The company blamed this on sleeping demand in China, which is the most appropriate reason, but then they also blamed the strength of the U.S. dollar which has eaten up their profits. Apple also downgraded their forecast for the fourth quarter, perhaps a tactic which many Wall Street firms use, promise less and deliver more.
On the commodity front, gold is still under pressure and there are still no signs of it recovering. The precious metal is one of the most unloved commodity among its investors. With the threat of the U.S. rate lingering, the future for the metal does not look much brighter either. Despite the weak U.S. economic data which has been released most recently in the past two weeks, the odds are still stacked in favour of two rate hikes between now and towards the end of this year. Although, it is highly unlikely that the Fed will adopt this path regardless of the economic data. The Fed surely are concerned with the impact of divergence in monetary policy and it is a different fact, if they make these concerns vocal or not. Nonetheless, a rate hike itself is a risk for the U.S. economy, which can make investors to hedge their risk by using this yellow metal.