A consideration for markets is the more recent deterioration in US high tech stocks as the high tech sector has been a key driver of the US equity market in recent years, and the demise in high profile stocks may threaten broader confidence in US equities, the US economy, and global risk appetite, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.
“Some of the issues that have hit confidence in this sector are likely to linger. These include regulatory pressure brewing on Facebook and setbacks for self-driving vehicles. Fears over regulatory pressure in the sector spilt over to Amazon on Wednesday.”
“The rebound in the USD on Wednesday seems a bit odd in the context of weakness in its equity market and lower US yields. As such we cannot be sure it will last.”
“The tech-centric sell-off in recent weeks has increased risk for the highly leveraged Tesla. Its rapid slide in recent days is generating negative feedback for high yield bond markets and points to risk of broader contagion to other asset classes.”
“The prospect of more permanently elevated high yield spreads suggests downside risk for USD/JPY (notwithstanding its bounce in recent days). It might threaten currencies of deficit EM countries. It could spill over to weaker global growth expectations and undermine EM and commodity currencies more generally.”
“As the risk is coming more from the US tech sector, it might support the EUR against the USD as an alternative safe haven.”
“US Treasury bond yields have retreated in recent days along with weaker US equities; this may yet undermine USD/JPY and support EUR/USD in coming sessions. However, it must be noted that the USD yield advantage has increased significantly over the last year, and just now as the yield spread has narrowed a bit, the USD is performing more strongly. As such it is hard to say how the USD will react, if at all, to the recent fall in US yields.”