Typically, at this time of the year, markets enter a holiday period induced slumber, usually characterised by a rally in stocks that lasts from mid-December until mid-January. In effect, some quiet time that allows traders to switch their focus away from markets and to enjoy some festive season cheer. While the FX markets appear to have received the holiday memo, the volatility evident elsewhere over the last 24 hours provides a reminder that not all markets are ready for holiday mode, as crude oil prices fell -6.6% to close below U.S. $46.00 a barrel, copper futures fell -3.4%, taking total losses for the year to just under 20%, while S&P500 futures closed the session on their lows for the year.
The falls in commodities followed China’s President Xi speech yesterday at the 40th anniversary for Reform and Opening-up in which he emphasised that no one was able to dictate what steps China takes, there should be no "bullying" and there should be respect for different development models. A clear reference to the U.S. - China trade dispute, however what really spooked markets was the absence of any mention of further economic stimulus to bolster a flagging Chinese economy.
As highlighted in previous reports, there is a relationship between Crude Oil and the S&P500 (chart below). The rationale behind the relationship is that both commodities and the U.S. stock market provide a gauge of the markets view of global economy. Higher equities and higher commodity prices suggest growth is humming along. Lower equities and lower commodity prices warn that all is not well. Hence it was not surprising to see U.S. equities unable to hold onto their gains from earlier in the session, echoing the move lower in commodities.
Also fuelling global growth concerns was the release of Germany’s longest business survey, IFO yesterday which fell to its lowest level since December 2016. Attention now turns to tomorrow mornings FOMC meeting, the outcome of which will be released at 6.00am AEDT.
The expectation is for the Fed to raise the federal funds rate target by 25bp to sit within a band between 2.25%-2.50% and to signal data dependency in its statement. There is the possibility that the 2019 GDP forecast of 2.5% will be reduced and for the longer-term dot falling from 3.00% to 2.75%. A lot to digest, overall though the market is expecting the Fed to deliver a “dovish hike”.
The remarkable and somewhat concerning aspect of this is with markets expecting a dovish hike, U.S. stock markets and commodities have again broken lower this week. Bearish price action that indicates concerns over global growth are outweighing expectations that the U.S. interest rate hiking cycle is approaching its final stages.
Technically, the view for U.S. stocks isn’t much better. In articles and videos over the past 6 weeks we have highlighted the danger of further declines in the S&P500, should the 2600/2590 level give way. The break of this level earlier in the week opens up a move towards the wave equality target 2474 area.
Should the S&P500 fail to bounce from the 2474 area (+/- 20 points) there is risk that the down move can extend towards 2200/2100, another 15% lower. To negate the bearish technical picture and to improve the outlook for 2019, the S&P500 needs to reclaim the 2630/50 resistance area on a closing basis.
Source Tradingview. The figures stated are as of the 19th of December 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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