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Global indices storm higher

By David Morrison  |  18/01/2019 15:22
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Global stock indices shot higher as the weekend approached as traders shrugged off disappointing corporate news
 
Global stock indices continued to rally in early trade on Friday. Investors ignored disappointing numbers from Netflix, choosing instead to believe speculation concerning a potentially positive development in the US-China trade dispute. On Thursday the Wall Street Journal reported that Treasury Secretary Steven Mnuchin supported moves to ease tariffs on Chinese goods during trade negotiations. The idea was that this would encourage Chinese policymakers to edge closer to the US position. However, US Trade Representative Robert Lighthizer is understood to oppose such a move, arguing that it displays weakness on the part of the US negotiation team.  This is understood to be President Trump’s current position as well. The story broke soon after it was announced that China's vice premier, Liu He, will travel to Washington at the end of January.
 
Traders “buy the dip”
 
Yesterday’s trading volume was respectable but some way below the average seen since equities turned lower in October. Nevertheless, traders are desperate to find any excuse to buy US equities. Many now believe that the bottom is in and so consequently calculate that there’s limited downside from here. If we look back at the behaviour of the major US indices since March 2009, every significant sell-off has reversed quickly and proved to be an excellent opportunity to load up on cheaper stocks. So, there’s now the best part of a generation of traders and investment professionals that has never experienced a full-blown market melt-down. Of course, there have been some significant wobbles such as those caused by the Euro crisis, the Fed’s attempted taper and Chinese devaluations. But these were all resolved by central bank intervention of one form or another, and it could be argued that this time is no different. The equity market rally over the last three weeks has coincided with the US Federal Reserve under Jerome Powell swinging violently from hawkish to dovish. On top of this, the People’s Bank of China has hosed its markets with liquidity this week following a slew of dismal data releases. In addition, the European Central Bank’s (ECB) balance sheet continues to expand, despite last month’s announcement that its Asset Purchase Programme was over. So, current market behaviour suggests that recent history should repeat, and we can look forward to a positive year for equity markets and fresh record highs for the US majors.
 
Doubts remain
 
Maybe, but maybe not. Most equities are cheaper than they were back at the end of September, but they’re still not dirt cheap, especially US ones. The fresh dovish Fed rhetoric is certainly a positive (despite what it implies about the resilience of the US economy), but the central bank still forecasts 50 basis-points of rate hikes this year and continues to wind down its balance sheet thereby withdrawing liquidity from the market. Recent economic data releases point to slowdowns for China, the Euro zone and the US which means the narrative has switched from last year’s synchronised global growth to one of a synchronised decline. On this subject, the data suggest that the slide is just getting started; in other words, this is not just a dip in the fourth quarter which will reverse quickly. We’re going into a difficult first half when it comes to corporate earnings given the tough year-on-year comparisons. We’ve already had some disappointing numbers from the banking sector and these followed on Apple’s sales warning last month. Yesterday Netflix released solid earnings and subscriber numbers, but the stock fell as revenues fell short. Tesla lowered its fourth quarter profit guidance and announced that it is cutting 7% of its workforce.
 
S&P 500 chart
 
Technically, the S&P 500 is trading back above 2,630 - the 50% retracement of its October-December sell-off. This area also happens to mark the ‘triple bottom’ which formed in the fourth quarter of last year and which was broken so spectacularly back in December. The index has also pushed above its 50-day exponential moving average (EMA). This is all undoubtedly positive and will be even more so if the S&P can consolidate above 2,630 next week. There’s a band of resistance between 2,675 and 2,700 marked by the 100 and 200-day EMAs and the 61.8% Fibonacci Retracement of the October-December sell-off. But the big challenge for the bulls is the ‘triple top’ which comes in around 2,800.
Obviously, 2,630 is now the first line of support followed by 2,600. But a break below here on significant volume could see sentiment switch from positive to negative extremely rapidly. 
 
 
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