Written by Hussein Sayed, Chief Market Strategist at FXTM
Investors across the globe are finding it difficult to decide whether to buy the recent dips, or remain on the sidelines until the dust settles. After gaining 1.2% on Wednesday, the S&P 500 closed 0.5% lower in the biggest reversal since 25 August 2015. It seems volatile instruments continue to dominate investor behavior. After falling by 7 points on the opening of the U.S. trading session, the VIX made its way again to 28 towards the close, suggesting that volatility may stay for longer. Speculators could have some fun trading such a volatile market, but this isn’t true for longer-term investors.
Many contrarians would like to follow Baron Rothschild’s advice, “Buy when there’s blood in the streets.” As of now, I do not see any blood, but a healthy correction which has been overdue for a long time. From a valuation perspective, the forward price to earnings ratio on the S&P 500 has dropped from 20 at the beginning of the year to below 18, suggesting that prices are still expensive when compared to historic averages. Deciding to buy, sell, or hold is a tough one in such circumstances, but if investors believe the global economy and corporates will continue to perform well, the downside risk is likely to be limited from current levels. However, another 5-10% correction should not be ruled out.
Fixed income markets have started looking attractive and, if the surge in bold yields resumes, there will be more incentives to pull out from stocks to bonds. That’s why bond markets, particularly in the U.S., will play a major role in how much further the correction may continue.
Sentiment remains positive towards Indonesia’s economy
Most Asian currencies weakened against the Dollar on Thursday as sentiment remained shaky following the global equity sell-off earlier in the week. The Indonesian Rupiah depreciated during Thursday’s trading session with the USDIDR trading around 13600 as of writing. While emerging market currencies such as the Rupiah could remain pressured by a resurgent Dollar, this may not impact the positive sentiment towards the Indonesian economy. It must be kept in mind that when compared to other nations in the ASEAN region, Indonesia’s economic fundamentals remain solid. With domestic consumption recovering, inflation moderating, and commodity prices rising, the outlook for Southeast Asia’s largest economy remains highly encouraging.
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