Stocks appear ready to pick up the new trading week right where they left off last week. After a significant sell-off in China overnight, U.S. equities are looking quite weak once again and it appears that the selling has not yet exhausted itself. In addition, crude oil prices have broken below $40 per barrel in overnight trade and weaker oil will likely continue to weigh on the energy sector and overall market.
Investors will have plenty to chew on this week in addition to monitoring global equity markets and emerging market currency markets. Investors will get the latest readings on new home sales, the Case-Shiller housing price index, Q2 GDP, weekly jobless claims, PMI services flash, durable goods orders, pending home sales, consumer sentiment and consumer confidence.
Overall fear is quite pervasive in the marketplace currently, and seems to be at levels not seen in several years. While the sheer panic in the air currently could potentially see markets stabilize as longs throw in the towel, it is difficult to tell when the selling may have run its course. China is currently the focal point of investor angst, and recent weakness in the world’s second largest economy is apparently taking its toll on investor sentiment. Add to this the ongoing uncertainty over the interest rate outlook in the U.S. and you have the recipe for a stock sell-off.
Some analysts believe that ongoing weakness in China may be more of a consideration for the U.S. Federal Reserve than domestic economic data. Recent commentary from the central bank was construed as being dovish, and this could potentially help fuel a rally gold. If the Fed decides to hold off on its initial rate hike due to concerns about China, it may potentially weaken the dollar and in turn possibly boost gold. The recent rally in gold erased several weeks worth of losses and it appears that the large short position in gold is being unwound. Due to increasing risk aversion, the rally in gold may potentially have some room to run — especially in the near-term. With concerns over the health of China’s economy seemingly growing by the day, gold may potentially benefit as investors seek out perceived safe haven assets.
Stocks are nearing correction territory, and if current levels do not entice investors to get back into the market, more capital may potentially flow from equities into gold and other precious metals. One could even argue that in the current environment of low interest rates and both equity and commodity weakness there are few alternatives for investors to put cash to work in.
