11th September - Global Equity markets are finely balanced
14 September 2015
TECHNICALS:
FTSE futures monthly chart
The market has clearly failed to break 7000. The sharp reverse has brought the market right back to the bottom of the two-year trading range.
There is powerful support at 6000 there’s no doubt.
But the bulls remain anxious.
Partly because of the multiple failures at 7000 (three over a period of 15 years).
Partly because the pull-back to 6000 this time has breached the long bull diagonal trendline support from 2009.
That broken diagonal now lies above the market, as powerful resistance on any rally.
But nor can the bears be relaxed. on the long and medium-term charts they need 6000 to break
FTSE futures daily chart
The bears can be a little more encouraged on the short-term charts: a band of horizontal resistance lies close by above the market at 6177-6357.
And while the market has been pausing beneath that band, a bear wedge may possibly have been created.
So the bears will be watching closely for a break beneath the rising diagonal of the wedge ( currently at 6100) that might signal fresh selling - but not before!
FUNDAMENTALS:
The recent sell-off in global equity markets, provoked by the economic weakness in China, may have halted. But the markets have failed to recover. The initial bounce away from the lows has failed and merely developed into a period of range trading.
Despite talk of a fresh Chinese stimulus and comments from the ECB that they will do more if the Euro zone economy requires, stocks look vulnerable.
What is weighing on the market?
Next week the US Federal reserve meets to decide on what to do with US interest rates. After months of signalling that they will raise rates this year in response to a recovering US economy, they now have only two meetings this year to act: next week’s meeting and a final meeting in December.
Traders and investors have assumed that the weakness of China and the impact that has had on markets would encourage US policy makers to leave interest rates at current levels. And indeed ,one or two FOMC members have voiced that opinion. But others have spoken in favour of acting now because of the tightening of the US labour market and fears that current low levels of inflation are transitory and will soon evolve into higher inflation.
That uncertainty about what the Fed will do at next week’s meeting is what is behind the current price action in stocks..
But will markets really sell off hard if the Fed does act?
Is a Fed rate hike not already priced in?
And would a decision to leave policy on hold be more damaging to equity markets?
The answer to the first two questions is yes, stocks would probably sell off if the Fed hikes by the previously expected 25bp, because that expectation has at best been watered down, if not removed from traders expectations.
So would stocks rally if the Fed leaves policy unchanged? Probably not. That is because then they will have simply introduced a three month period of uncertainty where policy makers are likely to express conflicting views. And also because China continues to threaten the world with a bout of exported deflation as a result of falling prices and a weakening currency.
The answer may be for the Fed indeed to hike next week, but by a token 10bp. That would remove uncertainty about whether and how the Fed will act, but re-assure markets that US monetary policy is indeed on a very slow and gradual path back to a more neutral level at about 2.5 -3.0%.
We shall have to wait until next Wednesday evening, but unless the Fed finds a way to finesse its decision, global equity markets could well be on the verge of a further sharp leg lower.
In summary stocks look vulnerable and any new bad news will push them over the edge.
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7th September -Gold remains weak