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MARKETS TODAY: Traders expect greater downturn against the US dollar

May 7, 2024

With 65.61% of traders expecting a downturn in USD/JPY, conventional wisdom might suggest preparing for a decrease. However, the market often defies direct expectations, and the relatively high ratio of bears might hint at an overcrowded trade.

For EUR/JPY, the sentiment is similarly bearish with 69.73% of traders betting on a drop and a short-to-long ratio of 2.30 to 1. Despite this, a sudden decrease in bearish intensity could be a precursor to a change in trend.

The situation with GBP/JPY mirrors that of EUR/JPY, with 65.45% of market participants predicting a decline. The short-to-long ratio of 1.89 to 1 suggests a significant but not overwhelming bearish sentiment.

This overall sentiment of declined growth against the US dollar, combined with a reduction in bearish positions, introduces a level of uncertainty. It may be prudent to forecast a potential equilibrium or slight bullish movement, reminiscent of the 2016 surprise rally following a similar sentiment setup.

Stock market resilience

Despite negative sentiment, the stock market has shown surprisingly resilience, underpinned by first-quarter earnings surpassing expectations. Despite headwinds such as inflation and high interest rates, the market’s robustness is evident.

Indices-wise, this year has seen the S&P 500 climb roughly 8%, with a 5% increase in earnings per share during the first quarter. This is the best performance since mid-2022, indicating strong market fundamentals.

Across the board, different sectors are adopting cost-saving strategies that were initially popularised by big tech companies last year. This shift is expected to bolster profit margins across various industries, though it is too early to comment on the results.

While the typical trend is for companies to lower their earnings forecasts, currently only 55% are predicting weaker earnings for the next quarter, which is below the ten-year average of 63%. This unusual optimism could support continued market stability.

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