Stocks, futures, gold and crypto all extend drop

Analysis: why is everything dropping?

 

When margin calls and liquidations happen, traders close everything to free up margin. That includes crypto, gold and stocks. This is what partially explains why even gold is down in this risk off environment, something which of course doesn’t come as surprise to us as we had highlighted the downside risks yesterday. But European markets, which had until now, remain buoyant, they too are feeling the pressure after the tumble on Wall Street yesterday trigged a risk-off tone across financial markets.

 

 

The UK’s FTSE has now relinquished its entire weekly gains to turn lower with commodities also under pressure, while the tech-heavy German DAX leads the markets lows here in Europe. US stock index futures slipped again on Friday morning, down by another 1% or so, following the lead of a downbeat European and Asian session.

 

After an extraordinary run that began in April, the tech sector has finally started to wobble, with valuations looking overstretched in recent weeks. A lack of fresh data, growing unease over how far prices have run, and the absence of any compelling new catalysts have all contributed to a risk-off mood. It wouldn’t be surprising if markets stayed a bit jumpy for a while yet, though it’s still premature to call the top of this cycle.

 

What other factors are causing the risk off tone?

 

Source: TradingView.com

 

Apart from valuation concerns and profit-taking, you have to consider the fact that the Fed is essentially flying blind after the US government shutdown left them without crucial economic data, and that uncertainty is beginning to unsettle investors too. Policymakers at the Fed are confronting the awkward mix of sticky inflation and a softening labour market at a time when the shutdown has disrupted the release of vital economic indicators. That leaves investors and policymakers alike guessing.

 

High-momentum and retail-favourite stocks bore the brunt of Thursday’s shakeout. Many of those winners this year have been AI-linked names, where valuations have ballooned on waves of enthusiasm. Investors’ willingness to overlook lofty valuations was tied to the expectation of lower interest rates. With that narrative now losing some of its shine, traders are trimming exposure to the pricier corners of the market.

 

The sheer pace of the rise of AI related stocks had left some investors wondering whether enthusiasm has overtaken reality. Recent trading sessions suggest people have taken profit on those names. Whether this signals waning risk appetite or simply the usual ebb and flow of a bull market remain to be seen, but either way, it’s a moment to stay sharp rather than complacent.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R