The working hypothesis presented at the end of the summer, relating to the probability of a modest stock market correction of 5% from the recent highs of the indices, occurred promptly. In fact, for several weeks, the primary indices had consolidated close to the highs of the period without finding new upward stimuli, confirming a technical distribution situation. The only thing missing was a catalyst that could serve as a justification for starting a selloff, which appeared in the form of a resurgence of Covid-Sars 2 induced by the umpteenth variant which this time surfaced from South Africa. Although the scientific community has repeatedly hypothesized that the Virus would have undergone various mutations over time, more contagious but less virulent, the emotionality of international investors, in any case looking for an excuse to sell, made the stock market indexes register yet another mini flash crash, exhausted, as in previous occasions, in the short span of a few sessions. Even the assumptions of holding the support levels of the indices were substantially respected, in the sense that the US S&P 500 reached a minimum of 4513 points, just below the technical support at 4550, while the EURO Stoxx 50 approached the psychological support of 4000, registering a minimum of 4063.
Therefore, the basic strategic thesis regarding the preservation of the positive trend of the stock markets which began in the spring of 2020, remains confirmed, in the sense that only an error of assessment by governments on the matter of fiscal policy or of the major central banks in terms of monetary policy, could initiate a serious corrective phase.
The decisions of the issuing institutions are those to be analyzed with greater attention, as they are inextricably linked to the assessment of the current inflationary upsurge, which over the months, in their interpretation seems increasingly destined to prove to be lasting and not transitory. In fact, the respective monthly bulletins confirm that the ECB and the Bank of Japan started selling securities on the market during the summer, while the Fed started in October. In addition, Governor Powell recently stigmatized the fact that he had changed his opinion that inflation was transitory while instead he said he was worried that it could have lasting connotations, anticipating the start of the repurchase of securities on the market by several months. It should be noted that since March 2020 the FED has bought securities on the market for almost 3 trillion dollars and the ECB for almost 4 trillion euros. By quantifying the current inflation problem, it is noted that in the Eurozone the trend rate, excluding food and energy, is 2.6% and in the US 4.6%. Clearly, the comprehensive data is much higher, at 4.9% in Europe and 6.2% in the USA. The Sword of Damocles that hangs over the markets with the start of the new stock market year is therefore constituted by the serious possibility that the monetary authorities are making a mistake, in the sense that the structural deflationary forces that have dominated developed economies since 2008, could to re-emerge forcefully in the middle of next year, once the contingencies of the post-closure period have been overcome, such as supply chain bottlenecks in international transport and the viscosity in the labor market caused by helicopter money. If this were the case, the newborn economic recovery would be penalized with obvious consequences to the stock markets.
On the currency front, it is not surprising that the euro suffered particularly on the foreign exchange market in relation to the pandemic upsurge, while the Swiss franc and the US dollar strengthened. For the latter, doubts could be raised about its resistance with the start of the new year, in the sense that the strength of a currency does not depend only on the growth forecasts of its economy, but on factors such as the flow of foreign capital that depends on the decisions of the Fed and the international demand for safe-haven assets, such as the dollar. As previously mentioned, the FED could be late if inflation were to consolidate and after ten years of constant international investments in US government bonds, the safe-haven function could be absolved. Therefore, it is advisable to monitor the level of technical resistance of the euro / dollar exchange rate at 1.14, which, if violated with conviction, could lead to a recovery of the Euro.
Nicola Bravetti Data Source: Bloomberg
Data obtained on 08.12. 11:00 GMT
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