MARKET OBSERVER – N° 116

The dynamics of the world’s major stock exchanges in the wake of the G20 meeting in Buenos Aires at the beginning of December raises important questions about the medium-term trend of the securities markets. In fact, despite the substantially positive international agreements concluded on that occasion, after an ephemeral increase the markets during the last weeks have registered a marked decline, quantifiable in percentage points. Even the technical assumptions related to the levels of index quotations were found to be fallacious, except for the US Dow Jones and S & P 500, whose next levels of support were not broken. In fact, the other main international indices have been in a bearish phase since the beginning of February, while the US indices have begun to come down only in the beginning of October, but the acceleration of the movement requires attention. The problems with which the markets must be confronted, starting from the beginning of the year, go from the generalized slowdown of economic activity, except for the United States, to the reduced propensity for investor risk, to the flattening of the yield curve induced by the demand for safe refuge, but above all to the normalization of monetary policy implemented by all the main world central banks.

The latter factor is probably the catalyst for the current downtrend, which can no longer be considered a correction, but rather a change of trend in a negative vein destined to last at least until mid-2019. The experience of the last decades has taught us that for governments and central banks it is almost impossible to intervene in an optimal way to direct economic cycles; think of the many failed attempts at soft landings of the successive economic upturns in the last few cycles. So, it is not surprising that now the credit crunch implemented to normalize monetary policy after almost ten years of Q.E., is proving to be too accentuated and poorly coordinated at the international level. In fact, since the beginning of the year all the main world central banks are draining liquidity from their financial systems regardless of the fact that the economic cycles are asynchronous, in the sense that Asia leads the slowdown due to the Chinese situation reverberating throughout the area, Japan included, while Europe has had a modest economic cooling and the United States maintains real GDP growth of between 2.5% and 3%. The governors seem to have realized only now that the strategy of the cost of zero money prevents any stimulus intervention if the situation gives way, by implementing a sudden change of policy that will only worsen the situation. The global stock markets can only draw a logical conclusion, considering the lower liquidity available for loans and the modest economic forecasts, more than sufficient reasons for the downward correction of the stock markets. It is no coincidence that the last market to go into a correction was the US in early October, just because the FED had implemented yet another increase in the base rate, while the market considered it inappropriate. Governor Powell has recently made an amends for this decision, but during the meeting on December 19, perhaps it is better to proceed with the expected increase of a quarter of a point, in order not to give the market the confirmation that the situation is no longer under control. The FED will always be able to reduce rates via interventions in 2019. From a technical point of view, the main indices show a very deteriorated picture, as they all present a sequence of constant breakage of support levels, which started in February. Since then, several indices have sacrificed more than 15% compared to their maximum level, thus falling rightfully into the definition of “bear market” which usually lasts at least 18 months.

To tackle this negative scenario, it is better to sell into short-term technical rebounds, waiting for the US and European indices to give a further 5 – 7%, respectively, before making new medium-term investments. To quantify, the break of the 2600 / 2580 area of the S&P 500 gives way to the next support at 2450, while a break of support at the level of 3000 of the EuroStoxx 50, would open the way to the level of 2850 / 2750.

Nicola Bravetti Data Source: Bloomberg