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Equity markets were remarkably strong this week with US and European markets rebounding 7 to 8% from last week’s lows.
However it is hard to see risk appetite to extend for long given the many uncertainties. In addition to China and energy worries, two new concerns further weigh on risk: the slowdown in US growth momentum and the global tightening of financial conditions.
US macro have not been disastrous, but came generally weaker than expected. Most importantly, the normally strong sector, consumer spending and services, have shown signs of slowdown. Additionally, the global rise in the cost of debt increases the risk of default (already high in the energy sector) and should reduce future investment, hence consumption.
At the same time the previous concerns remain unresolved. China capital outflows continue, and a sharp devaluation of the RMB cannot be ruled out. While oil price recovered, there is still a long way for many producers to become profitable.
Equity indices are now approaching key resistance levels to keep an eye on. These levels will be important tests to see if the bulls can remain in control.
SP500 resistance @ 1950 (Jan 29th high)
Euro Stoxx resistance @3000 - 3060 (jan 29th high, horizontal resistance, 38.2% Fibonacci)
Dax resistance @ 9500 (horizontal resistance)
SMI resistance @ 8000- 8050 (horizontal resistance, 38.20% Fibonacci)