Stocks Attempt Rally on Government Optimism
Stock markets traded under pressure for most of the week, as the US government shutdown has led to heightened uncertainty that removed most of the incentive to put money into stocks and higher yielding assets. This downside pressure in equities was widespread, as spread betting markets in all areas of the globe (from the UK to the Eurozone, to emerging Asia). These downside moves were relatively unsurprising given the fact that we are also seeing increased chances that various central banks are less open to adding more monetary stimulus, so the confluence of bearish events is making it difficult for the major stock indices to post sustainable rallies.
The biggest story of the week was clearly the government shutdown in the US. Policymakers have reached a critical impasse in its budget agreement and this is important for world markets because any further stalling increases the possibility for federal debt defaults. If this were to occur, major market volatility would be expected, as changes in credit ratings would be likely and trends in bond yields would become largely unpredictable.
We did see some bullish reversals into the end of the week, however, as investors start to shift to the argument that the worst of the debate is behind us and that a resolution will be seen soon. Spread betting traders will need to remain aware of developments in these areas, as any indication of a budget agreement will push stock prices substantially higher and could lead to a test of the yearly highs in the S&P 500. Next week will be critical for the ultimate trends seen into the end of the month for these reasons.
The S&P 500 saw some massive increases in volatility early in the week, falling below support levels at 1670 before stabilizing. Prices reversed back toward the weekly open, however, and the resulting rally is much more encouraging given its more stable advance. At the moment, the key areas to watch are found at 1695 resistance and support at 1680. A break of one of these levels should determine the direction seen next week.
The FTSE 100 is starting to form a stable uptrend channel on the shorter time frames, and this suggests we will see an upside break of resistance sometimes next week. The main levels to watch at 6470 (resistance) and 6435 (support). At this stage, there is much more room to the upside, so traders should look to buy breakouts once resistance at 6470 is overcome.
The DAX closed weaker than the other major indices last week, as there was no real attempt at a rally and prices carved new lows for the week below 8580 in the process. We will need to see some progress here early in the week if DAX bulls expect to see a positive close for the month. First resistance comes in at the 8640 level.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.