A turbulent start to the week for global markets. After shrugging off another bout of weakness in Chinese equity markets, the DAX got off to a flying start overnight to be up over 2%, buoyed by the news that Angela Merkel would not stand for re-election as the Chair of the CDU after her current term expires and that the China Regulator was intending to propose a 50% cut to car purchase tax. German car manufacturers surged higher, led by a 6.9% rally in Volkswagen AG.
Just after lunchtime in New York and with the Dow Jones trading about 350 points higher, the positive sentiment quickly evaporated as the following worrying headlines hit the wires.
*U.S. SAID TO PLAN NEXT CHINA TARIFF WAVE IF TRUMP-XI TALKS FAIL
*ADDITIONAL $257 BLN IN TRADE WOULD BE TARGETED ON NEW U.S. LIST
U.S. stocks quickly reversed lower and for the second time this year, all major U.S. equity indices officially entered correction territory, to be down 10% from their highs, with the Dow Jones the last of the key U.S. indices to fall into line.
Thus far, a feature of the October decline has been the lack of obvious signs of panic. In fact, the decline has been rather orderly, especially when compared with the dislocation seen during the February correction as reverse volatility products such as the IVIX were hastily unwound. Perhaps coming so soon after the February correction, investors have become more mindful that corrections are a normal and healthy part of stock market behaviour and as such are operating under the presumption that once the dust is settled, markets will quickly reclaim recent losses.
Of that we are not sure. There remains a smorgasbord of geopolitical headwinds that need to be countered which we have covered extensively in past updates, including the small matter of an escalating trade war, and a repricing of global growth prospects. However, I do feel the price action from overnight has become more supportive of a bounce in the near term.
In last week’s update https://www.cityindex.com.au/market-analysis/are-we-there-yet/ the importance of the 2610/2590 support level was highlighted and overnight the S&P500 traded right smack bang into the middle of that support band, before staging a recovery in the last hour of trading.
While we feel it is still too early to call with any certainty either a broad-based recovery or the onset of a rolling bear market, I feel the support band mentioned above will provide a very useful pivot point for equity market traders in coming sessions.
As such, providing the S&P 500 remains on a closing basis above the 2610/2590 support region, my preferred scenario is for the S&P500 to recover a portion of its recent losses. Conversely, if the S&P 500 does break and close below 2590ish and then below the February 2529 low, it greatly increases the chances that the 2947 high of September 2018, marks the end of history’s longest ever bull market.
Source Tradingview. The figures stated are as of the 30th of October 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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