MARKET OBSERVER – N° 101

Confirming the positive trend that have characterized international stock markets since the US presidential elections, it is observed that the markets are holding fast despite the ongoing attempt in the US to discredit the new White House tenant. Experience teaches us that crises of political origin have a limited effect, in terms of duration, on stock exchanges, which instead contemplate fundamental aspects. If we consider that just a few weeks after taking office, the US media hoped for the impeachment of the new president, it is understood that, for now, the effect of the case of the alleged obstruction of justice reported by the press is contained. The situation could only get worse if the popularity of Mr. Trump would fall below the threshold of 30%, in which case the Republican members of the Congress and Senate who support him, could reconsider their position, if they become worried about the outcome of the mid-term political elections scheduled for 2018. So the hypothesis is that there is a limited downside risk for the principal stock indices, which can be quantified by the technical support levels of 2350 / 2330 for the S&P 500 index and 3350 and 3325 for the EuroStoxx 50. However, the consensus among market observers is still cautious, in the sense that the overbought markets indicated by the price levels reached by the indices has led to prudence in the expectation of a significant correction that would allow stock prices to become more compelling. However, this thesis does not sufficiently take into account that since the start of the crisis in 2008, the monetary authorities have entered 10 trillion dollars into financial systems through credit stimulation measures. Added to the private sector’s liquidity, amounting to 14 trillion, these monetary stimuli have increased world liquidity by 24 trillion, for a total value of about 114 trillion, accounting for 145% of global GDP. As the recent dynamics of the US Dollar shows, US GDP growth in the 2017 / 2018 will disappoint expectations and that the recovery in Europe, even though above forecasts, will be modest and gradual, considering that the forced slow re-entry of such a marked monetary stimuli may penalize short-term or mid-term rates may prove premature.

So this excess liquidity, that over the last few years has had the merit of preventing the crisis from turning on itself, will continue to be a provision for further equity purchases in the medium term, which are considered in moments of modest corrections, precisely because the unsatisfied demand continues to put pressure on the international markets. If we then analyze the recent dynamics of the bond sector, there are other confirmations that the restrictive modification of the monetary policies in place will be less marked and more gradual than generally assumed. In fact, the German 10Y yields grew by a few tenths of basis points, while those in the US 10Y were even lower than at the beginning of this year. In order to have a significant increase in stock prices, we must first see an equally important correction in fixed income markets, which may not be imminent. Given that the bourses are currently supported by the improved economic fundamentals, it is strategic to evaluate the economic dynamics of the different macro-economic regions in order to determine the trend. It has already been noted that in this respect the United States may disappoint while the Old Continent should be a positive surprise, but the opportunities offered by the Asian markets must not be neglected. The Chinese stock market, which has not been particularly brilliant in recent months, may be close to a major recovery both due to the central bank stimulus and, above all, to the effects of the ambitious international investment plan in infrastructure known under the acronym BRI, “Belt and Road Initiative”, entailing a public outlay of $900 billion. Even after a few months of a distribution / accumulation phase, the Japanese stock market may be able to overcome the important psychological level of 20,000 points on the Nikkei index, helped by return of monetary stimulus. On the currency front, the dollar accelerated its downward trend, well above the support level of Euro 1.10, which is now a possible target for a retracement, while the possibility remains of rising to 1.15 / 1.17 with the European currency in the coming months.

Nicola Bravetti Data Source: Bloomberg