Can central banks turn the markets around again?


Mario Draghi inspired the market once more signaling the ECB might act in March. While crowded short sellers may get squeezed further in the short-term, Draghi alone is hardly sufficient to withstand fears of a china hard landing and untimely fed rate hikes. Georges Soros himself said “a hard landing is practically unavoidable”.

This week central bankers including the Fed and the BoJ will probably try to reassure investors, however, that they take any actions seems premature. China said last week that it had no intention of devaluating the renminbi, but it seems hard to believe considering it said so already last august.

Equity markets fell sharply mainly for two reasons, the oil price slump and slowing growth in China. Oil is still oversupplied with inventories showing record levels, hence the rebound is probably short lived. As for China, which faces both a stock market bubble and slowing property market, it is unlikely to offset its shrinking manufacturing sector into services anytime soon. The government will probably cut rates and bank’s reserve requirement again this year, leading to further depreciation of the Yuan. A weaker CNY could help China boost exports, but will not solve a sluggish domestic consumption, plus it will have the effect of exporting deflation in other parts of the world including developed markets.

Technically on the daily charts equity indices entered bear market territory with major breaks. On a longer term basis (weekly & monthly) equities are clearly losing momentum. On the SP500, the 1820-1830 support zone has been tested for the third time, after October 2014 and August 2015. This could be the last hurdle before taking the weekly and monthly charts into definitive bearish trend. On this basis, one should rather look to use rallies as selling opportunities.

SP500 2016

Note the S&P 500 still trading higher than one standard deviation above the long-term average, and stocks have probably further to drop.

S&P 500

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