MARKET OBSERVER – N° 115

The stock markets in October held on to the infamous tradition that saw them characterized by selling, recording the worst monthly performance in the US S&P 500 index since 2011 and since 2012 for the MSCI World index. When it comes to justifying selling, especially in the aftermath of a new historical high in the index, investors always find valid arguments that specifically range from the umpteenth increase in the US base rate, to the dispute with China about customs duties and the sharp increase expected for the US government deficit in the coming years. The main topic, however, is the Fed’s monetary policy, as the hypothesis that the Central Bank has gone too far in the process of credit tightening has made its way among market participants. The administration in Washington, itself, stigmatized the action of the Central Bank, even if the mid-term elections were inline with the forecasts without apparently being affected by the latest increase in the cost of money. However, the nervousness of the stock exchanges in relation to the generalized process of monetary policy normalization, continued to influence the index dynamics during the last weeks, characterized by an initial bounce from an oversold stance, followed by the recent retest of the lows in October. This is a technical picture characterized by a double bottom that could lead to a rebound in stock prices during the latter part of the year. To quantify, the US S&P 500 index has support in the 2600 / 2660 range with the first important resistance level at 2820, while the EuroStoxx 50 index should find support between 3100 and 3150 and important resistance at 3280. Defensive sectors are preferred in this environment, while the technology and the oil sectors are less favored. This hypothesis is based on two considerations, that corporate profits, above all in the USA but also in Europe, are more than satisfactory, albeit incompatible with a continuation of the downtrend and that the latest indications from the world’s major central banks point to a generalized stalemate in credit tightening, probably induced by the fear of the reactions of the stock markets.

In this complex framework, the element to be followed with attention remains the US dollar, whose parity has stabilized on recent highs compared to the Euro, even if the consensus of strategists would indicate that a pause in the phase of rising costs of money pursued by the Fed, could push it towards technical support at 1.17 with the Euro. This working hypothesis, however, does not seem to sufficiently take into account the uncertainty that will characterize the Old Continent, and therefore its currency, until the European elections on May 2019, thus allowing the greenback to make some progress in the short term. As a result, if the dollar remains healthy, the stock markets of emerging countries and the commodities sector in general will hardly be able to aspire to anything more than a consolidation near the recent lows, while their prospects could improve with the start of the New Year. In Asia, the Chinese economy is struggling to recover despite the commitment of the central bank and the government, also negatively affecting the short-term prospects of the Japanese stock exchange, orphan of the yen’s creeping dynamic since the Bank of Japan decided to stabilize the yen / dollar exchange rate instead of fixing the yield on 10-year government bonds at zero.

Nicola Bravetti Data Source:Bloomberg