Stock Markets Rally Despite Tapering Decision
Spread betting markets received fresh impetus to send asset prices higher, as macro data helped to offset the potential negatives that could have been seen after the US Federal Reserve made the decision to actually start making reductions in its monthly stimulus purchases. At its December 17-18 meeting, the Fed announced plans to cut quantitative easing programs by $10 billion each month. This move was largely in line with market expectations.
So, while these reductions pose a clear long term negative for stock markets, the immediate damage in stock valuations was minimal. Any downside moves were quickly reversed, and stocks actually posted new record highs in many cases after US GDP data came in much stronger than analysts estimates. What is most significant about this data is the fact that it shows the effects of the late-summer government shutdown were not as bad as initially expected, and this helps to confirm the bias at the Fed to begin reducing quantitative easing stimulus packages.
Looking ahead, market volatility is likely to show declines in the coming week as holiday-thinned trading conditions prevail and traders look to take profits at these elevated valuations. Expect range trading conditions to dominate, with little in the way of event risk to promote significant moves in either direction. Psychological levels are likely to provide the biggest barriers for the downside however, so expect the effects of any profit taking to be limited as well.
The S&P 500 has now broken above to new all-time highs, closing just below the 1820 level into the Friday close. The move is encouraging as it clearly suggests positive momentum as we head into next year. But with the S&P 500 showing little in the way of downside corrective retracements, we can expect the near term gains to be limited. Downside support can be found at the 1800 psychological level, followed by historical demand levels in the 1775 region.
Last week, the FTSE 100 made a significant turnaround into the final sessions. The index managed to bounce off of support levels near 6440. This is a support level we have discussed previously and given the surge in prices seen here, this is the key downside area to watch going forward. A downside break here would be a very bearish event but as long as 6440 holds, the bias is bullish, with the next upside target to be found now at 6680. Expect downside corrections to be limited next week.
The DAX gave back some of its recent gains two weeks ago, but markets have since reversed and traders are now clearly set on a retest of the all-time highs above 9400. As has recently been the case, the bullish moves have been forceful and we have seen little in the way of corrective retracements in the index. We will need to see a break of resistance at 9420 in order to confirm the uptrend has more bullish potential.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.