S&P 500

Mixed start

US stock index futures were mixed in early trade this morning having drifted lower after a positive start. There was some evidence of profit-taking following yesterday’s recovery which partially reversed Monday’s dramatic sell-off. This morning, the International Energy Agency (IEA) cut its global oil demand growth estimates for both 2018 and this year with demand from Brazil, China and Japan in particular all coming in below the agency’s previous estimates. The news added to worries that tepid global economic growth is already being affected negatively by the US/China trade dispute.

Weak data from China

Overnight brought the release of Chinese Industrial Production, Retail Sales and Fixed Asset Investment. All came in below expectations and registered declines from the previous month, with Industrial Production and Retail Sales performing particularly badly. The data reinforces the view that the slowdown in Chinese growth hasn’t yet bottomed and supports the argument that existing tariffs resulting from the US/China trade dispute have already damaged global supply chains. The weaker data has also boosted speculation that the Chinese authorities will once again step in with another blast of fiscal and monetary stimuli, although there’s no evidence that previous rounds have had a lasting impact. The Shanghai Composite ended today’s session nearly 2% higher, while the Chinese yuan slipped and remains close to the lows against the US dollar seen back in December. Later today we have US Retail Sales and the Empire State Manufacturing Index.

Jawboning the trade dispute

Risk assets recovered yesterday after President Trump insisted that “…China talks will be successful," adding that "we will know in 3-4 weeks," suggesting a rapprochement in time for the June 28th G-20 Summit in Osaka. But not all analysts are convinced that this will prove to be the case with some speculating that this dispute could meander on for months, or more concerning, escalate into something more dangerous, given the stand-off between the US and China over the South China Seas. But on Tuesday President Donald Trump attempted to play down the trade dispute, referring to it as a “little squabble” and insisting talks had not collapsed. However, tensions continue to run high. China has announced tariffs on $60 billion worth of US goods. This came in response to the US raising tariffs on $200 billion of Chinese imports to 25% from 10% with a further levy to come on an additional $300/325 billion of Chinese goods.

S&P Charts

 

At the end of April the S&P 500 closed at a fresh all-time record high just above 2,950. The sell-off since the beginning of this month was triggered by a failure to bring the US/China trade dispute to a successful conclusion, although that can has now been kicked to the end of June. As is often the case, markets go up the escalator and down in the lift. That’s to say they fall faster than they rise and can go from overbought to oversold very quickly. The first chart shows the S&P reversing direction sharply on testing the 100-day Exponential Moving Average which comes in just above 2,800.

But a look at this second chart (courtesy of TradingView.com) shows just how significant this level is. Not only does it mark the 23.6% Fibonacci Retracement of the December 2018 – April 2019 rally, but it also coincides with the triple top which formed in the last quarter of 2018. The area around 2,800 is acting as support for now, but a serious and sustained break of this level could lead to a rush to cut long-side exposure.

Prices have bounced off the 100-day Exponential Moving Average.

This also corresponds to the 23.6% Fibonacci Retracement of the December 2018-May 2019 rally.

 

David Morrison

Core Spreads

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