S&P 500 Threatens 1800 Break as Tapering Fears Reduced
Spread betting markets saw some new record stock valuations last week, with the S&P 500 knocking on the door of 1800 into Friday’s close. Most of this positive sentiment has been driven by a relatively strong earnings season, better than expected GDP figures and an apparent reluctance at central banks around the world to start cutting back on much needed economic stimulus programs in the face of sluggish growth in both developed and emerging markets. The latest validation of this came from the nominee to be the next Chairman of the Federal Reserve, Janet Yellen, who essentially implied that stimulus programs will remain in place “as long as is necessary.”
To many, this might sound like a vague statement that is largely useless for those looking to trade the markets. But for most investors, this reluctance to withdraw stimulus has been interpreted as a green light to go ahead and continue buying stocks. Fortunately, there is some additional fundamental support for these price moves, as economic data and quarterly earnings have shown steady improvements relative to market expectations. When looking at the S&P 500 specifically, roughly 75% of the listed companies showed bottom line results that were higher than market forecasts. There have been some issues on the revenue side but broader cost cutting measures have helped to keep margins healthy.
Central Bank Policy
For spread betting trader, the key issue going forward will be the extent to which central bank policy can remain constant and support the outlook for corporate earnings into 2014. So far, the Federal Reserve has been the only major economy that has hinted at reducing stimulus. In contrast, the European Central Bank actually made its policy more accommodative at its last meeting, cutting interest rates by 25 basis points. This is a new record low for the Eurozone, and it ultimately suggests that the ECB still feels there are enough negative after effects in the regions sovereign debt crisis to continue limiting growth prospects and put added strain on the already vulnerable labor market. Of course, lower interest rates are positive for stock markets as this means it is easier for companies to finance their investments.
Upside movement in the S&P 500 continues, with prices now showing a new record close just below 1800. For shorter term traders, an upside break of the psychological level should accelerate gains, to the downside support comes in at 1780.
The FTSE 100 has been one of the most of the volatile of the stock indexes, with prices showing strong reversals after hitting resistance at 6810. Downside support is now seen at 6600.
The DAX is once again threatening resistance at 9200. We have already seen an attempt in markets to break this level once before this month but the limited pullback suggests that there is more upside to be seen. Expect a break of 9200 next week.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.