Equity markets at key inflection points before ECB tomorrow

SP500 inflection

Equity markets rallied over 12% in less than 4 weeks and are now close to key inflection points. The SP500 retraced 61.8% of the entire bear move since the June 2015 top, and sits close to the 2000 psychological level. The DAX and SMI are also not far from major resistance at 10000 and 8000 respectively.

The rally, which was mainly driven short covering of the weakest sectors i.e. commodities and bank, is quickly losing steam. Clearly, without the help of the ECB tomorrow and the BoJ next Tuesday, equities will have a hard time to breakthrough these important inflection points.

Central banks have the ability to give equities another leg up, but by zooming out a little on the charts, you would be quick to see that the potential upside seems limited in comparison to the downside risk.

On the macro side, China saw its exports decline 25.4% YoY yesterday, hence a one off devaluation of the RMB remains a possibility. Oil is also unlikely to extend gains, should suppliers fail to strike a deal on controlling output. Additionally, the refugee crisis and Brexit risk are escalading. On the other hand US data remained fairly solid, but for how long in this global context?

With this in mind, you might want to have a look at the Volatility index again. The VIX April futures (expiring Apr 20th) now trades back at 20.50 after it reached a high of 26 in February and a low of 18.50 last year.

VIX April Future - Daily
VIX April Future - Daily

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