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18th February - World stock markets send conflicting signals

22 February 2016

TECHNICALS:

FTSE MONTHLY CHART:

The FTSE remains beneath the broken prior high support of 6086. And the prior lows at 5955/6042 now resistance.

NIKKEI WEEKLY CHART

 The Nikkei remains at or beneath the broken support from the  Prior Highs of 16000 and 16340

WEEKLY CHART :

The market remains beneath the broken prior high support of 6086. and beneath the Prior Low resistance at 2951-2970.

DAILY CHART

BUT here’s the problem for the bears: the S&P remains in a trading range. Until that range breaks there is no easy bear trade.

FUNDAMENTALS:

The sell-off in global equity markets that has dominated much of 2016, came to a halt last week, as a correction took hold. And although risks to global growth remain, with Japan posting Q4 GDP of -1.4% annualised, still tepid growth in the Euro zone, signs of a cooling of growth in the UK and the US, markets bounced away from the lows.

There are several reasons for the current change of mood:

The ECB President Draghi said again last week that the ECB can do more,
Russia repeated her offer to coordinate an oil production cut with OPEC in an effort to reduce the global oil glut and boost the oil price, with Russian and Saudi oil ministers meeting on Monday and agreeing to hold production at January levels if other key players, especially Iran, do the same.
The Fed’s Yellen during testimony in Congress acknowledged the risks posed to the US economy by global economic weakness and market turbulence.

Although Yellen made it clear the Fed wasn’t about to reverse the December rate hike, her language makes any short/medium term rate hikes look unlikely, meaning the Fed could be on hold for much of 2016 because US economic activity has itself cooled sharply: US Q4 GDP was only 0.7% annualised.

Iran has responded to the Russian/Saudi agreement and welcomed the deal to cap production, but reiterated its right to increase her own production, so will the agreement hold? Currently markets think it could and the oil price has recovered back above US$30 taking equity markets with it.

But the story in global equity markets is fragmented!

In the US the S&P has put in a solid rally over recent days making the previous sell-off look little more than a correction in an established bull market.

But in the FTSE, DJ EUROSTOXX and Nikkei, the price action still looks bearish and, unlike the S&P, the current rally resembles a correction in a broader Bear market.

The crucial question then is how will this dichotomy resolve?

In our opinion much depends on economic developments in the US. If economic activity there fails to recover and the recent readings of the two ISM surveys continue to slide towards recessionary levels; the manufacturing version is already in recessionary territory, the spot light will fall squarely on the Fed.

Fed Chair Yellen may currently be saying the December hike isn’t going to be reversed, but if in two or three months time GDP remains at current weak levels, what will her response then be? Clearly having to almost abandon the anticipated rate hikes planned for this year is worrisome, if the Fed was forced to ease it would suggest a loss of control and bad judgement and that would be negative for stocks.

Currently the outlook is a little cloudy. If US stocks extend the rally based on relief that there will be no near-term rate hikes, other global equity markets will probably continue to correct a little higher. But since the US didn’t experience a particularly harsh winter, the current economic weakness is worrying. In recent years, weakness seen during the winter months has been firmly attributed to very severe weather and a strong recovery anticipated as the weather improved, but that cannot be said with confidence this time.

We judge equity markets still look vulnerable and if the rally in oil fails so to will equity markets sell off once more. 

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4th March - the persistence of Gold

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8th February - Conditions for a Gold bull market

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