Stocks start week positively but optimism could fade

Sentiment towards risk improved further at the start of the new week, although it remained to be seen whether the optimism would last as not much has fundamentally changed with policy makers ramping up hawkish rhetoric. European stock indices and US futures extended their advances from the previous week with gains 1% or more. The US dollar fell, causing the likes of the EUR/USD, GBP/USD and AUD/USD to climb. Gold and silver gained, with oil also extending its rally for the third consecutive day. Bitcoin extended its advance to above the $22K handle.

The biggest factor behind these moves is undoubtedly short covering. The markets have been going lower most of the time this year, with many investors reluctant to buy any dips due to a plethora of worries. Among other things, these include surging inflation, low economic growth and rising interest rates around the world. Given that these worries are still out there, you would have to remain nimble and take extra care as the markets can resume lower at any moment. Thus, I am continuing to expect to see a bumpy road ahead for stocks and other risk assets for the foreseeable future.

There’s also been some talk of inflation being near the peak and investors betting that price pressures will start to weaken going forward. Tomorrow’s publication of US CPI should shed some more light onto this thesis. But one thing is clear: prices have risen more sharply and remained elevated for much longer than many people had expected. With the energy crisis getting worse in Europe, it is difficult to be optimistic about the future, even if governments are trying to address the issue with the introduction of price caps for Russian energy exports and (inflation-boosting) measures to limit consumers’ energy bills. While the government stimulus will be welcomed, it is unlikely to make a material difference. I think the damage is already done.

The DAX has managed a decent bounce after looking like it would have dropped to a new for the year at various points last week. But with a few short-term resistance levels broken, this has raised hopes that perhaps it might be able to avoid that. For what it is worth, I do not regard this recovery as a major turning point given that it has not been supporting by any positive news flow. Thus, I remain on the look out for new bearish signals to emerge as the index tests some important technical levels here at just north of 13300 (where it had previously found resistance).