Global rebound shrugs off more flak

Summary

Stock markets are shrugging off flak that would have buried attempted rallies just weeks ago.

The quick evaporation of turbulence triggered by Samsung’s profit warning helps confirm that tumultuous conditions of late last year have truly passed. To be sure, the switch is helped by a return to more ‘normal’ levels of liquidity and the natural tendency to seek fresh opportunities early in the year. Still, risk-supportive factors have a more adaptive Fed stance at their heart. They’ve been enough to override ambivalent prospects from low-tier trade talks and confirmed speed bumps in German output.

Heavyweight Samsung is low drag

It is probably no coincidence that the impact on shares in Samsung was contained to a 1.7% fall. That’s despite announcing it expected profits for the October-December quarter to fall almost 30% to 10.8 trillion won, 22% below average forecasts. The implication is that whilst an unpleasant surprise, the downgrade was not much of a shock after all Apple’s sales warning. Furthermore, the industry from which Samsung generates three quarters of profits, semiconductors, has been in a widely recognised cyclical down cycle for around a year months, contributing to a 24% fall by the group’s stock in 2018. Much like its Californian counterpart, investors are at least just as focused on the Korean giant’s growing pile of cash, expected to reach  $100bn, by year end from around $70bn now. Looking at the modest 0.6% fall of Korea’s main stock index, investors do not expect heavyweight Samsung to become a significant drag.

Dollar risk set low

A rebounding dollar isn’t raising bells for shares either. Investors watching the apparent reversion of dollar proxies are aware signals haven’t looked this unpromising for the greenback in months. In DXY, one consequence of Fed chair Jerome Powell exercising the ‘Fed’s Put’ last week is that short-to-medium-term moving averages now tilt lower. The gauge now trades beneath a couple of key ones as shown below. DXY is also below a region where it’s expected to face challenges after strongly corroborated 96.14 support collapsed in December.

Soft dollar support

As such, considering the emergence of a dovish fault line in Fed policy that could widen further, depending on the read from minutes of the last FOMC decision, coming on Wednesday, short-term fundamental and technical analytical considerations for the greenback portray a challenging path. As seen at the start of the week, at the moment, investors are primed to interpret broad dollar softness as supportive of risk seeking, given the loosening effect this has on global financing conditions. Likewise, an ambivalent light is cast on the nearby outlook for large stock markets. Earlier wavering in the global market day is setting up to be as shallow as Monday's. Stock markets are unlikely to have put the dark end of a dark year definitively behind them, but the rebound narrative is intact for now.