After last Friday strong rally, the FTSE closed down yesterday. It seems the rally is running out of steam. Same thing in the S&P 500, I was expecting a rally near 2070, but the highest level yesterday was 2055 and the index closed down.
Today the indexes are lower in pre-open, it would appear that the counter trend rallies are complete. Beside the wave count, stock markets have limited upside in the next four weeks mainly as a result of the uncertainty surrounding the referendum in June. Fear of Brexit will keep investors on the sidelines. This means, and as we move into June, the sellers will outnumber the buyers and chances are the stock market will move down.
Yesterday the Prime Minister warned of a DIY recession if Britain leaves Europe. Whether he is right or not, his comments will not re-assure investors. In addition talks of higher interest rates in the US will add more pressure on stock markets. Therefore there is a good chance the high at 6216 will remain intact.
This level is the top of wave 2 of a five-wave decline. From that level the FTSE declined below the 55-period moving average (on the 90-min chart). The index is now back above the 55-period moving average. In a bear trend a move above the 55-period moving average is a sell signal, so the decline should resume. Alternatively wave 2 is not yet complete and there will be another move up above 6216 before the decline resume. That is because wave 2 retraced less than 50% of wave 1, in general a second wave retraces 50% or more of the first wave.
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All those concerns about monetary policy divergence at the beginning of the year, as markets speculated about the timing of further moves by the Federal Reserve to tighten monetary policy, appear to be back on the table again after a rather hawkish set of minutes from the most recent central bank policy meeting.
Having removed the reference to global financial developments as an ongoing risk in its last statement, and with Fed Chief Janet Yellen having suggested in comments prior to that meeting that the Fed was more than happy to proceed cautiously in terms of raising rates, given recent weak data, markets had probably become overly complacent about the prospect that the Fed wouldn’t raise rates in June.
It would appear that the improvement in the economic data in the past week or so along with last night’s minutes appears to have disabused markets out of this mistaken assumption, with the result that the probabilities of a move in June have risen from 4% to an almost one in three chance that rates could rise. With Fed vice Chair Stanley Fischer due to speak later today that percentage could rise further given he tends to lean to the hawkish side.
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We saw another negative day for European stocks yesterday as investors digested another mixed day for earnings and oil price fluctuations. After two successive weeks of losses equity investors appear to be struggling for reasons to get back into the market with any conviction against a backdrop of weakening economic activity.
This week saw a trifecta of weakening industrial production data for March from Germany, France and Italy, which has raised concerns that we could well see the latest EU Q1 GDP number get revised lower later today. There was widespread optimism less than 2 weeks ago when the initial estimate of GDP came in at 0.6%, above both the US and UK numbers.
Given recent data, as well as recent downward revisions, that estimate now seems optimistic and could prompt a downward surprise to nearer 0.4%.
Before that we get to see the latest German Q1 GDP number, and this could also see the initial 0.6% estimate get nudged lower as well.
While US markets were able to shrug off a disappointing US jobs report on Friday the positive close wasn’t enough to stop a second successive lower weekly close, as investors weighed up the prospects for a move on US interest rates at next month’s Federal Reserve rate meeting.
For all the rhetoric from various Fed officials that the June meeting is a “live” meeting, along with the claims that at least two rate rises this year is a reasonable expectation, the narrative doesn’t match the underlying data, which remains on the soft side, and would appear to support the expectation that we are highly unlikely to get a move on rates next month.
While the hawks can take the positives from of a jump in average hourly earnings to 2.5%, the fact that we saw the April payrolls number come in at 160k, pretty much in line with the ADP report was an unwelcome surprise, and an even bigger disappointment to those expecting a pick up in the data after a weak Q1 GDP report.
There is a concern that the recent improvement in the latest Chinese data could well have been a false dawn, and the recent April manufacturing PMI data would appear to reinforce that with this morning the latest Caixin manufacturing data for April showing a slow down to 49.4 from 49.7, following on from the official numbers at the weekend which slipped back to 50.1. With services also softening a little in April this could well be bad news for the commodity currencies which have seen a bit of a rebound of late.
This rebound has caused a few concerns at the Reserve Bank of Australia which has seen the Aussie dollar jump higher in recent weeks and the subsequent slip back into deflation last week appears to have prompted the Australian central bank to cut rates further to a record low of 1.75% in response. While this was predicted in a number of circles the slide back into deflation is not too surprising given the recent declines in commodity prices in Q1. It also ignores the fact that these same prices have rebounded, which means that this may well have been a temporary phenomenon.