Global stocks short pause looks almost done

Pressures on risk appetite aren’t going anywhere

Consider the key factors that nudged speculative and outright sellers to take their feet off the pedal earlier:

• Typical month-end influences like contract expiries, portfolio rebalancing, or simply anticipation of their impact
• Technical signals: the biggest ‘safe-haven’ market, long-dated U.S. Treasurys, is now unmistakably overbought
• iShares’ 20+ Year Treasury ETF has surged 8.8% over 3 months. S&P 500 futures have bounced after testing the lower side of their 200-day moving average
• More fundamentally, deepening malaise is raising anticipation of policy action. The EU bank sector was among Thursday’s outperformers as the ECB is expected to detail its new loan programme next week. A 50 basis-point 10-year Treasury yield slump since early March is analogous to the two rate cuts Fed funds futures price by year end 

Technicals and seasonality often turn out to be temporary reasons to lighten up. Yet the suddenly re-escalated U.S.-China trade conflict shows no sign of calming. Likewise, Brussels and Washington’s automobile-centred spat is still lurking in the background. Elsewhere in Europe, Italy’s FTSE MIB swung into the red on Thursday after Deputy Prime Minister Matteo Salvini insisted he would rather collapse the coalition government than backtrack on tax cut plans. As such, Rome could soon move even further away from EU fiscal prescriptions, keeping the ‘doom loop’ that played havoc with European markets last year front and centre.

As for policy hopes, recent minutes show the Fed remains solidly neutral. The divide to market expectations could lead to more disappointment before the gap closes. And whilst the ECB’s two-year loans are expected to be offered at negative rates, they won’t reimburse lenders for the ECB’s long-standing negative deposit rate. All in, the case for global stock markets to strengthen anytime soon isn’t compelling.

Chart thoughts

An important question is whether the S&P 500’s break below its optimistic January-to-April rising channel has generated enough momentum for a near-term breach of its 200-DMA, currently at 2777. The question will inevitably loom large in the market’s collective psyche unless the S&P rises clear. The Stochastic Momentum Index isn’t particularly helpful; it can certainly get more oversold. More promisingly, the correction has not (yet?) been serious enough to reach the 38.2% Fibonacci of the December-May advance. Support from 11^th March’s aggressive kick higher from the 2741 low is also likely. First though, the market must close above a prior prop of 2785, confirmed in March; and another at 2800 from earlier this month. These will now pose a nail-biting test of resistance.

Price chart: S&P 500 E-Mini Futures (CME, continuous) – Daily [30/05/2019 19:33:09]

Source: Tradingview/City Index