The eagerly-awaited Obama and Bernanke speeches supported equity markets this past week but turned out to be very much non-events. Attention of traders will remain on the next FOMC meeting on the 21st September.
Meanwhile, European problems still loom and the Greek debt rollover should come to some kind of conclusion Friday, or over the weekend at the latest. We also have the G7 meeting as a possible risk event over the weekend but this should turn out to be nothing more than a useless jawboning exercise.
On the bright side, the Citigroup Economic Surprise Index keeps recovering and the dividend yield on the S&P 500 is again below the 10 year treasury yield:
Citigroup US Economic Surprise Index – source: Bloomberg
The combination of these figures and expectations of “QE3-like” action from the Fed should keep providing relative support to US markets. But this remains pretty meager when put against the European situation.
Indeed, as long as there is no structural solution to the European sovereign/banks problems, we are left exposed to a major shock in Europe which of course would reverberate across global markets. We still see European banks, especially French names, heavily under pressure despite this past week’s rebound and continued pressure in the European bonds and money markets spaces.
The pressures in the bond markets are best illustrated by the spread of the Italian bonds over German bunds:
Spreads of BTPs over Bunds – source: Bloomberg
For the money markets, a look at the 3-month Euro basis swap shows the continued tensions in the USD funding market for European banks. And we heard this week, interbank funding markets in Europe are pretty much frozen…
Euro basis Swap 3 months – source Bloomberg
So, yes, most commentators are bearish, which is usually a sign that it is time to turn, but is the problem not a political issue in a Eurozone which lacks leadership and political courage? We believe that structural decisions will only be taken in Europe in an extreme emergency situation and this still needs to happen…
Looking at the technical picture, here the trends we have been looking at over the recent past. For DAX, the trend remains negative and this is justified by the fundamental issues touched upon above.
DAX cash index – 30 minutes chart – source: Bloomberg
Clearly, 5,500 is a big line in the sand (green line). What we refer to as the congestion area is where most of the volume has been traded in the futures market over the period. Hence this would come as a potent resistance area on the way up. Much good news (and we are left blank on the subject) would be needed to break this downtrend.
On the downside, there is not much else than hope in the way of the round 5,000 number so the path of least resistance remains to the downside. For the coming week, we will therefore watch how the German benchmark behaves around the 5,500 (should it come back there).
Just to give a bit more color to the overall trend, we reproduce the monthly chart for the DAX with the 12 months moving average as well as a standard MACD indicator. As we showed in a previous post, the standard MACD has proven to be a good long term rend indicator over the past 11 years:
DAX cash index – Monthly chart – source: Bloomberg
For the S&P 500, we show the points of reference we have used over the period:
S&P 500 September futures contract – 30-minutes chart – source: Bloomberg
The US benchmark has a bit more stickiness to the upside essentially due to the “Bernanke Put” and the fact that the US is one step ahead of Europe in coming out of the current mess.
In any case, the index is still trading in a congestion zone 1,205-1,175 and should find some support there but keep in mind that the 1,150-level is becoming more and more important as a support in the current uptrend for next week.
A break of this support should find us quickly testing the 1,130-20 support where the market may think that the Bernanke rescue team is sharpening their pencils once again…
For the upside scenario, we need to see the index hold 1,200 to make an attempt higher but we would use the strength to get back on the short side in the 1,220-1,250 area.
Overall, going into a volatile week, it may again be wise to look for a continued divergence in performance between Europe (DAX still being the only major index to be available for shorting in Europe) and the US (via the S&P 500).
source from: tradingfloor
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