Global Stocks Lower as Investors Overlook Economic Data
Global stock markets finished the week largely in the red, with the DAX, FTSE 100 and S&P 500 all posting a negative performance into the close on Friday. For the S&P 500, this was the first weekly decline since early November and at this stage it has become clear that investors are positioning themselves for a potentially unfavorable outcome in the well-publicized US budget talks (the so-called Fiscal Cliff).
The main evidence for this comes from the fact that markets largely overlooked the US Federal Reserve’s proposal to enact monetary stimulus in the form of bond purchases. And with this week’s positive economic data in the manufacturing sector, it was something of a surprise to see weekly declines in equity markets. Consumer stocks were the hardest hit group in the S&P this week, and Apple (AAPL) alone saw declines of nearly 4.5% during the period. The S&P 500 closed just above 1413, while the German DAX fell to 7596 and the FTSE 100 saw larger losses to close at 5913.
True Market Concern or End-of-Year Position Squaring?
Looking ahead for the next few weeks, the main question investors will be asking is whether these latest moves are an indication of true market concern over a potentially negative Fiscal Cliff scenario, or simply position squaring to book profits before trading slows at the end of this month. The combination of these factors could actually create a highly volatile end to the year in stock markets if there is not some evidence soon which suggests that a budget agreement in the US will be reached.
In the worst case scenario, holiday thinned trading volumes would be seen at the time the Fiscal Cliff agreement period expires. So, without any substantive plan to balance tax cuts with decreases in government spending, stocks could see a major plummet without a normal number of buyers and sellers in place to support prices. In the best case scenario, an agreement will be reached and stock prices will likely see a slow drift higher until markets return to full strength in the early part of January.
Either way, it is not altogether surprising to see investors take some risk off the table until there is confirmation of the outcome, one way or the other. Spread betting traders should pay special attention to these factors into the end of this month, as this is likely to be the main determinant of the next major trend direction.
The FTSE 100 managed to fill sell orders into the major long term resistance levels that could be found at the 5940 double top. Bulls are not exactly in the clear, however, as prices failed to close above this level on a daily or weekly basis, which makes the index vulnerable to false breaks. As such, it is best to wait for a daily close above 5940 before entering into new buy positions, targeting a further rise to 6080 before stalling can again be expected. A break below 5850 negates the bullish bias.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.