Equities and currencies markets saw a sharp rise in volatility into the end of last week, and this led safe haven assets (such as the US Dollar and consumer staples stocks) into some heavy selling pressure. Generally, when markets see abrupt changes and volatility increases, equity markets and high-yielding tend to encounter sell-offs, but this was not the case last week. Optimism generated by the positive outcome in the EU Summit meeting brought buyers back into the weak Euro and stock markets in most regions. Additional support for troubled European economies (Italy and Spain, in particular) was pledged, and this was more of a total response than markets were expecting.
Investors had gotten used to a continued lack of progress at these meetings, so the firm policy response (and the majority approval of enhanced aid programs from previously reluctant member nations) created a sharp upward reversal in equities from the declines seen earlier in the week. There is some potential for this move to continue, as volume levels were well above recent averages and there will be some key economic data next week that could propel markets higher if they help to confirm the recent optimism.
Potentially Volatile Start to New Week, Month and Quarter
As markets open on Monday, we will be starting a new week, month and quarter. Asian markets have yet to respond to the strong close that was seen in the US and European sessions on Friday, so it would not be surprising to see an upward extension when Tokyo begins trading. On the US side, critical macro data will be seen with ISM Services and Manufacturing numbers, the ADP Employment report, and the main event next Friday, when we will see the Non Farm Payrolls data and the US national Unemployment Rate.
It this was not enough to stoke last week’s volatility in itself, we will also have some major event risks in Europe, as the Bank of England and the European Central Bank (ECB) will release their interest rate decisions for July. Markets will be looking to see if central bank members will continue to make supportive comments and a majority of investors are expecting the ECB to further reduce interest rates by 25 basis points (to 0.75%). Any alteration in these trends will weigh on stock markets and bring some medium term selling pressure back into the Euro.
Late week reversals in the DAX and S&P 500 have altered the previously bearish bias in both markets. The S&P 500 is now trading above long term moving and Fibonacci resistance levels, so the next upside target is seen at the downtrend line drawn from the previous yearly highs at 1420. This comes in at roughly 1370 and an upside break here will be a very bullish signal for the remainder of the year. Resistance in the DAX is now seen at the confluence of 100 and 200 day EMAs, and there is likely to be some stop loss activity above these levels.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.