Saturday 2 June 2018

Weekend update - World equity markets

It was a very mixed month for world equity markets, with net monthly changes ranging from +1.0% (USA), +0.8% (Russia, Australia), +0.4% (China), -2.2% (France), -10.9% (Brazil), to -11.9% (Greece).

Lets take our regular look at ten of the world equity markets

USA - Dow

The mighty Dow climbed for a second month, settling +252pts (1.0%) to 24415. Underlying MACD (green bar histogram) ticked lower for a fourth month. However, price momentum is levelling out, and a bearish cross could be avoided into the summer. Note the key 10MA at 24058.

Best guess: another push upward, at least to challenge the Jan' historic high of 26616. Next key Fibonacci number is 26702. Any price action above that would indirectly be suggestive that the sp' will eventually follow >3047, and that would offer 5K on 2-4 year outlook. Sp' 5K would equate to Dow around 40k. To be clear though, I do not expect the sp' to be able to clear 3047 in the current wave, and instead would seek a major correction of at least 15-20%.

Germany – DAX

The economic powerhouse of the EU - Germany, saw the DAX settle -7pts (0.1%) to 12604. This was notably under the 10MA. The May candle is rather spiky on the upper side, and it leans s/t bearish. From June onward, core rising trend - from the 2009 low, will be around 11500. Any price action in the 11400s would merit full alarm bells, with a natural target of 8k. For now, the mid/long term bullish trend is still intact.

The systemic risk that is Deutsche Bank (DB) is clearly a critical issue. Negative rates from the ECB are killing the European financials, and Mr Market didn't just break a new historic low in this stock for no good reason. Its a monstrous problem, but no doubt the ECB would just ring fence the company, and print however many trillions is necessary to prevent the derivatives book from catching fire. After all, would you really expect Draghi (or his successor) to just sit back and see it take down the entire EU financial system?

Japan – Nikkei

Japanese equities settled -266pts (1.2%) to 22201. The m/t trend remains comfortably bullish. It is notable that actual bullish price momentum continues to weaken. Provisional alarm bells would need to sound with any monthly close <21k.

China – Shanghai comp'

The Shanghai composite gained 13pts (0.4%) to 3095, but that was well below the intra high of 3219. Chinese equities are indeed struggling. Things really only turn bullish again with a monthly close >3500, and there is little sign of that for at least 3-4 months.

Brazil – Bovespa

After three months of chop, the Brazilian market found a direction, and it was powerfully to the downside. The Bovespa imploded by -9361pts (10.9%) to 76753. There was a decisive break of the m/t bullish trend from early 2016. Next support is the key price threshold of the 74000s. There is ongoing societal/political upset in Brazil. Whilst higher commodity prices are beneficial to the energy sector, higher fuel prices are breaking the transport sector. Recent turmoil within Petrobras (PBR) - not least the Friday resignation of the CEO, sure isn't helping the Bovespa.

Russia - RTSI

The Russian equity market saw a month of relatively narrow range chop, settling +9pts (0.8%) to 1162. Whilst the RTSI remains under the key 1200 threshold, the s/t outlook has to be bearish. If the RTSI can re-take 1200, then original basic target of 1500 will be back on the menu. Higher energy prices would especially help the Russian market.

France – CAC

The CAC broke a new multi-year high of 5657, but then swung lower, settling -122pts (2.2%) at 5398, but still holding above the key 10MA. Upper bollinger is offering the 5700s in early summer. Next big target is the June 2007 high of 6168, and that does look within range by Aug/Sept'.

Spain – IBEX

The Spanish market settled -515pts (5.2%) to 9465. We have a very clear cyclical divergence from 2015, as price momentum is outright bearish. With PM Rajoy kicked out on Friday, there remains a serious underlying geo-political instability. That could arguably apply to most nations within the EU.

Australia – AORD

The Australian market climbed for a second month, +51pts (0.8%) to 6123. Next big target remains the Nov'2007 historic high of 6873. That is a clear 10% higher, but looks viable within 3-4 mths. Higher commodity prices would really help this market/economy.

Greece - Athex

The economic basket case of the EU - Greece, saw its equity market implode, with the Athex settling -102pts (11.9%) to 755. The m/t trend from early 2016 has been decisively broken, and it bodes at least s/t bearish into early summer.


Four markets were net higher for May, with six net lower.

The US remains the powerhouse of world equities, with Greece the weakest.

We have two notable breaks of the m/t trend from early 2016, in the Brazilian and Greek markets.

Grand overview

The last few months have seen increasing equity breaks arise, not least due to higher bond yields/rates and commodity prices. Whilst US financials and the energy sector will greatly benefit from the aforementioned, there is a downside element. The Brazilian unrest is one of the more troubling issues, and that is with oil only seeing the $70s. What happens if we see a spike to 80, or even 100?

For now, the leaders - USA and Germany, are maintaining their mid/long term upward trends. When those eventually break, it will bode for a correction far bigger than we saw across late Jan'-early April. My best guess is that we'll see upside across the summer, but after that wave has maxed out, it will make for one hell of a cyclical divergence to the January high.

Yours truly is holding to original big target of sp'2950/3047, That arguably equates to Dow somewhere >27k. If we do make it to around sp'3K, the more cautious retail traders/investors will be clearing the decks, in prep' for something 'real interesting'.

Ohh, and finally, just a little reminder...

... the ultimate 'equity/economic' alarm bell would be if the fed cut rates. First, I do expect a June hike. Further, if equities do climb this summer to new highs, with GDP >3.0%, then a Sept' hike can also be expected. That would be problematic for many things though, with the US 10yr yield likely to begin a surge towards 3.50-3.75%.

To be clear, if the next multi-month equity down wave, did not see the fed cut rates, I would treat it as just a correction. If instead the fed cut rates (and halt the QT program) during the next equity down wave, I'd look for something far more serious. The most natural outcome would be a back test of the 2000/2007 double top in the sp'1500s.

Looking ahead 

M - Factory orders
T - PMI/ISM serv'
W - Intl' trade, product/costs, EIA report
T - Weekly jobs, consumer credit
F - Wholesale trade

*Pres' Trump is set to attend the G7 meeting (Canada) June 7-8th. Ahead of that, the trade/tariff chatter will surely continue, and that would be one excuse for the market to take another swing lower.

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Have a good weekend

*the next post on this page will likely appear 6pm EDT on Monday.