Stock Markets Got off to a Slow Start Last Week
Stock markets got off to a slow start last week, as most investors waited on the sidelines for key event risks to pass before establishing new positions. Most of these stories were centered on the macro space (rather than on earnings), so some of the more erratic price changes were seen in currencies and precious metals (which tend to me tied much more closely with the changing developments in national data releases). But the data was still important for stocks nonetheless. On the whole, equities markets fared reasonably well given some of the negative outcomes. First, we had a series of central bank interest rate decisions to contend with, and while there were no surprising changes to interest rates, we did get some updated information on potential policy changes in both Japan and Australia.
At this stage, it looks apparent that central banks are set to commit to more hawkish stances on interest rates and this does not bode well for equities and riskier assets (such as stocks in emerging markets and in high yielding currencies). The real question, however, will be the US Federal Reserve, as this is the first central bank that has announced the view that stimulus programs can actually be reduced. A policy stance with this level of clarity is relatively rare when looking at things from a global perspective because most countries are still in the early stages in easing programs. Going forward, positive economic news out of the US might actually put pressure on stock values because this will lead to new speculation that quantitative easing programs are no longer necessary.
Stimulus, or Reduction?
Of course, in order to make this assessment, we will have to see additional data releases. One example can be seen in Friday’s Non Farm Payrolls report, which was relatively disappointing, at least when we look at the headline number. The jobs market is the central area of importance for the US Federal Reserve in making its next policy decisions, so the weaker numbers essentially suggest that “tapering” could hurt the US economy if it is not actually in a strong position to move forward without additional help from the Fed. Currently, a majority of the market still expects the tapering process to begin in September, and this is the reason (along with the latest weakness in macro data) the S&P 500 is having a very difficult time regaining its prior position at the old highs.
The S&P 500 is making an attempt to bounce off of historical and Fib support in the 1625 region, and so far this has held up. No major rallies have been seen since then, however, and this warrants some level of caution for those not positioned for new monthly lows. At this stage, the bias is moderately downward so it is best to wait for new declines before getting back into long positions.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.