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Mark O' Donnell
 · 
Research Analyst
September 8, 2020
 · 

Risk off as markets plunge

Risk off as markets plunge

Markets sold off as risk-off sentiment continue to seep into investors and traders' heads.

Dow Jones in Orange, S&P 500 in Blue, NASDAQ in Red, Brent Crude in Teal

The largest move downward was in the Oil markets, where Brent Crude and WTI were down 7 and 8% respectively, fearing that the demand recovery as stalled. The Summer Holiday in the United States, primarily associated with peak demand in Oil, currently marked its close on the Labour Day Holiday.

Stephen Schork, the editor of the oil market newsletter The Schork Report, highlighted that "demand recovery at this point is certainly done" and that the "entire oil complex is under threat right now."

As suppliers slowly bring back their supply to the oil markets alongside demand tethering off, the weak fundamentals play into any risk-off sentiment the needs may have. IHG Markit analysts, Roger Diwan, stated that "The weak state of fundamentals and the lack of any catalyst improvement in the near term are resetting price expectations."

However, it wasn't just the oil markets that sold off. US equities had a deep day in the red, with the NASDAQ down 3.67%, with the Dow Jones and S&P 500 down 1.68% and 2.16%, respectively.

Risk-off continues in the equity markets

As expected, tech stocks being the highest growers, were also the fastest fallers. The question arises whether the current situation is a healthy pullback or a continuing trend. Tom Essaye, a former Merril Lynch trader, stated that "some froth has come off the market, which is a good thing, but keep in mind we still remain well over levels that could be considered as "fair value" in stocks.."

This pullback in the markets comes at a turbulent time politically and economically. Amidst the pandemic, Brexit talks have continued. US-China tensions are heating up again, China Hong Kong relations are heating up again. Elections are not in months – they're in weeks. Federal Reserve continues to pump liquidity into the markets. It is interesting to note there is not much movement in Gold, suggesting that the sell off may be due to profit taking, not pure risk off sentiment.

What was interesting about today's sell-off is that if you re-read the text before this, you will see no fundamental change/data released to suggest a sell-off. Whatever the actual reason is, be it options traders unwinding their positions, or general profit-taking, stick to your analysis and don't get swayed by a swing in price during a turbulent period – as it is to be expected. Remember, volatility goes both ways. If you're a trader, you may want to sit this period out or take the time to backtest your strategies. If you're an investor, you may want to buy the dip as your analysis shouldn't have changed today just because of the sell-off.

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