How deep will the stock market correction be?

Monday's session saw a continuation of the sell-off on the US stock market. U.S. Treasury yields rose after better-than-expected retail sales data supported the view that The Fed will not rush to cut interest rates.

Continued geopolitical tensions caused the VIX "fear index" to rise above 19 points again. The dollar has gained and the EUR/USD rate this morning is close to 1,06. Gold after an initial decline, it regained its vigor. Oil ended the day in negative territory.

Results better than forecast

The declines on the stock markets are partly the result of good data from the US, which postpones the prospect of interest rate cuts. The market still remembers the last high inflation data for March and is also solid NFP report. Yesterday there were good retail sales readings, which increased by 0,7%. m/m February's result was revised up to 0,9 percent. from 0,6 percent initially. If we exclude cars and fuels, the result was even better and amounted to 1%. and sales only without cars amounted to 1,1%. The results turned out to be higher than those a month earlier and were much better than expected.

Of course, macro data is one thing, the second piece of the market puzzle is a geopolitical event. Yesterday, an Israeli commander announced retaliation for the weekend attack carried out by Iran. We have not received any details, but the announcement of escalation will certainly not have a positive impact on the mood and some investors are simply starting to slowly withdraw from risky assets. Israel's allies, including the US and the EU, have called for restraint. Meanwhile, G7 countries are working on a package of coordinated measures against Iran.

Reference point for traders

John Williams, who expects interest rate cuts, spoke from the Fed. in the US this year. However, no details were given regarding the pace and start of monetary policy easing. A representative of the Federal Reserve emphasized that the institution is closely monitoring what is happening in the Middle East and currently does not perceive these events as a major risk factor that may affect the US growth prospects.

Yesterday, the market saw a slight increase in the yield of US government bonds. 2-year-olds reached the level of 5,00 and ended the day at around 4,92%. In turn, 10-year bonds increased and exceeded the level of 4,66%. in the following hours they dropped slightly to 4,61%. Wall Street indices are increasingly overvalued and moving away from their records. The CFD contract based on the Dow Jones index was at its lowest level since January 19, reflecting the behavior of SP500 from March 7 and the Nasdaq100 index from February 22 this year.

The current correction is much smaller in scope than the one that occurred last year. However, there is nothing stopping the discounts from reaching the size of the 2023 declines. This can be a kind of reference point for traders. The dollar gained for another day in a row, which resulted in the rate of the main currency pair being very close to 1,06. USD/JPY pair set a new record of around 154,40. The strength of the dollar causes the zloty to lose dynamically. The EUR/PLN rate is at 4,3150 on Tuesday morning and the USD/PLN rate is 4,0644.

Source: OANDA TMS Brokers