30th January 2014 - The big trends are intact but sit on your hands
03 February 2014
TECHNICALS:
Weekly Bunds
The sharp move in the market has driven the markets back through the middle of a wide trading range…. But still the market remains well within the range.
Weekly S&P chart
The move was sharply down but has yet to test either the weak diagonal trend line support or indeed the horizontal supports from Prior Highs.
The big trends remain intact. So far. But until the trends have been tested, and found to be strong the bulls will be nervous.
FUNDAMENTALS:
The sell-off in bonds and the extended rally in equity markets expected for this year so far hasn’t materialised. In equity markets the price action throughout much of January was side ways, with a sell off late last week.
In bond markets the opposite has been true. In both Europe and the US bonds have staged a solid rally month long rally. What lies behind these moves?
There are, as always, several reasons, in the US:
In the Euro zone the reasons were straight forward:
Add in the emerging market crisis that surfaced late last week and a wave of risk aversion washed through markets, helping bonds even higher and weighing stocks down.
But does this mean there has been a fundamental shift in the direction of markets or are these moves temporary?
At this week’s FOMC meeting the Fed lived up to expectations and trimmed its QE3 monthly bond purchases by a further US$10.0B, but crucially policy makers made no reference to the recent run of US data or the emerging market crisis.
What does this tell us about how the Fed views the situation?
From a US standpoint the Fed has clearly discounted recent mixed US data and attributed it to the exceptionally harsh winter weather that has swept through much of the United States over recent weeks.
Only a few weeks ago US Q3 GDP came in at 4.1% and today Q4 GDP met consensus at 3.2%, so although a deceleration, still respectable. Additionally the last retail sales report released earlier this month was a little stronger than expected, so the economic recovery still looks on track, meaning the Fed sees no reason to continue adding to its crisis level stimulus.
And although emerging markets created something of a panic, the Fed sees the job of steadying them as a local concern. Indeed the central Banks of Turkey and India have increased rates and Brazil may soon follow suit.
With regard to China and the fears of an economic slowdown; again this is seen by the Fed as a job for the Chinese authorities. In fact the new leadership in China has implemented policies designed to rebalance the economy, so the current slower pace of growth there is likely an anticipated side affect.
So what does this mean for markets?
We judge underlying trends in Bonds and stocks will re-assert, but given low levels of inflation we are likely to prove more eager buyers of stocks than sellers of Bonds. But currently timing isn’t right, so keep your powder dry for now.
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