Global equity markets suffered the largest losses in over a year as concerns increase about the strength of the Chinese economy and the implications for emerging market economies around the globe. Unless conditions deteriorate significantly, I still expect the Fed to increase interest rates in September, which only adds to the negative sentiment.
I remain cautious on the market in the near term, and I don't see a catalyst for a move higher in the short term. This is probably not a contrarian move in stocks where you have been rewarded for buying dips of 5 percent. The market is long overdue for a correction. This week the S&P 500 has taken out key technical support in the July lows during the escalation of issues in Greece. We expect the S&P 500 to test the lows of 1862 from last October over the next several months. This move could come quickly, given the negative seasonality for equities and the markets' poor breadth leading into this decline.
Treasury bonds should benefit from a flight-to-quality bid in the short term, but I don't expect to see significantly falling yields. I do expect the 10-year Bond to trade below 2.00% in the next few weeks.
The epicenter of this weakness has been the performance of currencies and commodities. Watch the emerging market currencies for an indication if short term market conditions are improving or not. Strengthening oil prices would also be another sign of an improvement in market conditions.
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