After breaking through 2,800 for the first time, the S&P 500 closed 0.4% lower on 16 January. The S&P’s intraday move of 1.41% was the largest since early December and the fifth biggest since December 2016. The euro also retreated by 0.75% against the dollar from an intra-day high of 1.232, after European Central Bank Vice President Vitor Constancio, expressed “concern” over the euro’s sharp rally.
Bullish sentiment on equities and the euro is high, so occasional pullbacks shouldn't be a surprise. The cost of bearish S&P 500 options has dropped significantly relative to bullish options: the difference between the price (skew) of one-month 25 delta puts and calls on the S&P 500 is about two standard deviations below its five-year average. Net speculative long positions in euro futures are at their highest ever, according to CFTC data.
But we don’t expect these moves to be the start of something more long-lasting, as economic fundamentals haven’t changed.
- Equities should continue to be supported by solid global growth (we expect 3.9% this year after 3.8% last year) and robust corporate earnings growth (we forecast 8-12% profit growth for global equities).
- Meanwhile, current account dynamics, valuation, and incremental monetary policy shifts continue to favor the euro over the dollar.
Occasional corrections should be expected. We will continue to monitor the data, but it is important for investors to keep a long view and remain invested through the bumps. We remain overweight global equities and expect further euro appreciation against the USD over the next 12 months.
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