MARKET OBSERVER – N° 155

The corrective phase, which began on the primary international equity markets in mid-January, continues its course, having reached a technical level of oversold, which during the past three sessions has favored a rebound close to technical resistance levels. Taking the US S&P 500 index as an example, there was a break in the support located at 4350, which paved the way for a first approach to the next support at 4200, in fact the index rebounded from 4220, to then move to the aforementioned resistance level of 4530/4550.

There is no doubt that the indices are developing a distribution phase, which will result in a more significant correction in the second half of the year, while for now it will remain limited, in the case of the S&P 500 index; between the recent low of 4200, and the level at the beginning of the year; 4766. This distribution had already characterized the dynamics of the indices in the fourth quarter, as evidenced by the stability of the same close to the highs for the period, meaning that the supply was modest given that 2021 was a positive year for stock market investments and therefore there was no reason to ease by the end of the year, on the other hand demand was just as weak given the valuations reached by equity prices. With 2022, the need to correct this marked overbought level has become a priority, especially in sectors with high growth in profits, such as technology, and international investors have not been slow to find at least two valid reasons that justify the start of the realization phase in progress.

The growing geo-political tensions between Russia and the Western bloc over the strategic positioning of Ukraine, which the former USSR has always considered in its sphere of influence while Europe and the US have long been trying to attract westward, have escalated to the point of causing fear of an armed intervention by Russia that would have serious consequences. Secondly, the FED, after having been conspicuously late in retreating from the phase of strong monetary expansion started in the spring of 2020, suddenly accelerated the implementation schedule of the change of policy, surprising the market. In fact, the forecasts of the experts now indicate 4 increases of a quarter of a point in the key rate starting from March and a reduction of the FED budget by the end of the year, in the order of 1.5 trillion dollars, equal to 17% of the same. This is because the assessment of the transience of the inflationary phase following the supply chain issues due to the pandemic, has undergone a significant expansion from the approximately 8 months initially foreseen to the current 26, making a restrictive intervention in monetary matters inevitable, which in any case negatively impacts the estimates of economic growth. So, the next sessions and, in general, the stock market dynamics in February, will be characterized by a short-term bearish trend, with the serious probability of soon revisiting the recent low of the S&P 500 of 4200. The European markets, in general, showed a better dynamic than the US without recording significant technical violations of the support levels at the end of 2021, allowing maintaining positions in the defensive and undervalued sectors, as well as in cyclical stocks.

Therefore, probably, this is not yet the start of a long-term corrective phase given the excess liquidity still available in the various financial systems, and the tactic of buying quality securities during this decline remains valid, assuming a recovery of prices around the end of the first quarter. The primary Asian markets could present a dichotomous dynamic in the sense that the Japanese stock market has returned from a marked bearish phase that has deteriorated its underlying trend, while China, also recovering from a negative 2021, seems to be starting to offer opportunities. On the currency front, after initially failing to break support of 1.1410 against the Euro, in relation to the geopolitical tensions on the borders of Europe and following the recent statements by the Governor of the ECB, Mrs. Lagarde, concerning a possible stiffening of monetary policy to an anti-inflation stance, has again violated the support, confirming the hypothesis that the greenback will tend to weaken further.

Nicola Bravetti Data Source: Bloomberg
Data obtained on 07.02 11:00 GMT
“This report cannot – nor can – be considered a solicitation to invest in financial instruments”