A major test for global risk assets next week

Next week, market participants will be focusing their attention towards the last major economic event of the year, the U.S. central bank Fed FOMC meeting announcement on its latest monetary policy on Wed, 19 Dec 2018.

Why is it important?

The Fed FOMC will release its latest “dot plot” projections of key economic variables on U.S. economic such as GBP growth, inflation and more importantly, the future median trajectory of the key Fed funds rate where in the previous meeting held in Sep 2018, the Fed has expected 3 hikes in 2019 to bring the Fed funds rate to 3.1% and one hike in 2020 to bring it up to 3.4% before a potential pause on its current tightening/normalising policy cycle that has taken place since Dec 2015.

In the recent months, the Fed has faced much criticism from U.S. President Trump that has rebuked the U.S. central bank’s current tightening monetary policy stance to trigger a 12% decline in the U.S. stock market from its all-time high level printed in Sep 2018 that put a dent on business and consumer sentiment. Meanwhile, other U.S. administration officials had also shifted the “blame” to higher interest rates triggered by the Fed away from the on-going trade tensions between U.S. and China that are causing uncertainties in the international trade environment.

Interestingly, Fed Chair Powell started to shift to a more dovish outlook on interest rates where he commented that the Fed funds rate is coming close to a “neutral level” in a public speech to the Economic Club of New York on 28 Nov 2018. A change in Powell’s tonality dampened the outlook of interest rate hikes where the futures market had started to price in only close to one rate hike in 2019, a stark contrast with the previous “dot-plot” projections released after the Sep FOMC meeting.

Stock markets seem to be in favour of more accommodative Fed where the S&P 500 had rallied by 4.4% after Powell’s remark on 28 Nov and only to see its gains wiped out after the uncertainty on the ability of U.S. and China to struck a trade deal after the 90-days “trade war truce” grace period expire on 01 Mar 2019.  

As at today 14 Dec 2018, key benchmark stock market indices across the globe has started to decline again after a rebound in place since the start of the week and these indices are now approaching to test their respective Oct 2018 swing low areas. In conjunction, the US Dollar Index is now trying to break above its Oct/Nov swing high areas. Below are the longer-term monthly technical charts of the various key markets to watch and based on its current trajectory of its price actions, these markets will be testing their respective major inflection levels when the Fed officials meet next week on 18/19 Dec 2018.

S&P 500

• Candlestick patterns and momentum analysis from the monthly RSI oscillator has flashed out similar elements seen in Oct 2007 before Q3 2008 steep decline trigged by the demise of Lehman Brothers that kickstarted the Great Financial Crisis.
• The key long-term downside trigger rests at 2530 as per defined by Feb 2018 low triggered by a sell-off in ETFs that betted on a low volatility environment and the neckline support of a major bearish reversal “Head & Shoulders” configuration that is taking shape since Jan 2018.

Nikkei 225

• Key long-term downside trigger at 20800 where a weekly close below it may trigger a bear market in Japanese equities where the Nikkei 225 looks set to retest a major support at 14865 (the pull-back of its secular “Double Bottom” bullish breakout from its former neckline resistance, depicted in dotted green)

China A50

• The China stock market has already entered into a bear market territory where one of the benchmark stock indices, the China A50 has plummeted by 28% from its Jan 2018 now.
• Right now, it is attempting to hold at the major key long-term downside trigger level of 11000/10740 which is also the range support of a “Descending Triangle”, bearish continuation configuration in place 3 months ago from 24 Sep 2018 high.
•  A weekly close below 10740 is likely to open scope for a further decline towards the 8470/7900 major support (also the secular long-term ascending trendline from May 2005 low)

U.S. Dollar Index (futures)

• The U.S. Dollar Index has remained resilient in the past 3 months as it is now testing the median line/resistance of a secular long-term ascending channel in place since Mar 2008 low.
• A weekly close above 97.80 shall see a further potential up move to retest 103.45/103.85 major swing high area of Jan 2017.

Conclusion

The technical analysis charts of the various major stock market indices have started to show signs of deterioration on its key elements coupled with a resilient U.S. dollar.

Therefore, the Fed needs to decide whether to listen to the financial markets or the real economy where a recession has not materialised. Given such a relative low level Fed funds rate (below 3%) when compared to the start of previous recessions, a pause on its tightening/normalising policy in 2019 may not be a wise choice as when the next recession hit in late 2019 or 2020 as expected by most economists, monetary policy is likely to be ineffective to smooth out the economic downturn. As the saying goes, “with great power comes with great responsibility”.

Charts are from eSignal