Cautious start to the week

More dovish talks from ECB provided a risk undertone to financial markets, although the gains in the European and US sessions on Friday were quite modest. Nonetheless, last week was a pretty good week for equities after a terrible start to November.

European Central Bank
Source: Bloomberg

Looking at the weekly scorecard showed that the S&P 500 rebounded +3.3% almost erasing the losses that was incurred from the previous week (-3.7%). Likewise, the DAX rallied 3.8% last week, more than recouping the -2.5% from the previous week. In fact, the German index returned above 11,000 points to a three-month high. In contrast, US equities continued to struggle at the top end, with the S&P straining to break convincing above the 2100 level.

Logic would have told you that the increasing certainty of the Fed to raise interest rates would be ‘detrimental’ to stock prices, given its upside impact on the USD, and a strong USDs’ influence on US firms’ earnings. Therefore, US equities should be heading south, at least for a bit.

But my sense is that the market is looking beyond the first rate hike and focusing on Fed’s reiteration that the pace of rate normalisation is going to be gradual, very very gradual. Clearly, the FOMC minutes have hinted that the pace will be much slower than that of previous rate hike cycles. In that regard, despite the Fed potentially raising rates in December, it will still be considered as dovish in the grander scheme of things.

Added to that, you have the European central bank (ECB), still very dovish, with president Draghi saying that they must do what they must to quickly get inflation back up to target. The ECB is seriously considering boosting the size and composition of its QE programme next week.

In fact, the technical picture for DAX is looking towards the upside. As my colleague Joshua Mahony observed, we are seeing the prices forming a countertrend falling wedge pattern and broken the pattern. This suggested that further upside is likely, with immediate resistance levels at 11,152 and 11,166.

Meanwhile, commodities were somewhat stable since middle of last week. We have seen oil prices trading sideways, and copper slowing its descent. Gold was also fairly stable, although the resurgent US dollar may threaten that stability and bring about renewed slide.

Crude oil appears to find some bottom at current levels, although it will find it difficult to break higher as bears are clearly waiting in the folds to knock it lower each time there is a rally. Not many are convinced that we will see a notable recovery in global crude prices anytime soon, on restocking demand or genuine demand due to economic expansion.

Further to that, it is perhaps confusing for market participants whether they should trade on short-term bearishness or a slightly bullish view in the longer term on improving demand and supply situation.

This week will bring about some familiar month-end data which could provide some trading impetus. Manufacturing PMI reports from Germany and France, as well as the German IFO report would be closely monitored. A couple of US data, including durable goods orders, housing data, and second estimates to US Q3 GDP, would be of interest. Needless to say, a stronger-than-expected revision to the GDP would raise expectations of the Fed moving on rates in December.

In Asia this week, we will be looking out for Singapore final Q3 GDP and China industrial profits, while inflation data from Singapore and Hong Kong may elicit some interest as well. Japan’s PMI reading should be read in context with the monetary policy in mind, while BOJ minutes for the 30 October meeting will be released on Wednesday, which may provide more detail on the discussion around the pushing back of the 2% inflation target.

For today, the Shanghai and Shenzhen stock exchanges will implement the higher margin requirements, which was doubled to 100% from 50%. Japan’s financial markets are closed today. Asia may see a tepid start to the week, underpinned by cautious undertones.

 

*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG

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