Global stock rebound stalls, notes Fawad Razaqzada, as key resistance levels are once again tested
The global stock market rally that began in early January continued for another day yesterday and continued this morning in Europe, although stock indices momentarily gave up their gains while U.S. index futures turned flat. This morning’s brief dip came about after Bloomberg reported that a meeting between Presidents Donald Trump and Xi Jinping to sign an agreement to end the US-China trade war won’t occur this month and is more likely to happen in April at the earliest. Apparently, this was according to three people familiar with the matter. Truth be told, if this story turns out to be correct, it shouldn’t come as major surprise given that Trump himself has already hinted at the prospects of delay when he said the United States was not “in a hurry” to a sign a deal. Thus, there is a possibility that any weakness related to US-China trade talks being delayed could prove to be short-lived.
Looking ahead, though, there are a few key risks facing European and global stock markets in general. But sentiment is currently positive given the sharp year-to-date gains for China (nearly 20%), although the rally here has stalled a little over the past few days, while in the United States, the S&P 500 hit a new high for the year yesterday. Sentiment has so far been boosted by various factors, including:
• Hopes over (an eventual) trade deal between US and China
• Falling bond yields amid renewed dovishness from major central banks, boosting the appeal of the riskier equity markets
• Introduction of various fiscal and monetary stimulus measures from China
• Global economy not performing as poorly at the start of this year as had been expected
But despite the sharp gains for the United States and China, European markets are lagging behind slightly. European investors are not as jubilant in part because of ongoing Brexit concerns and weak economic performances across the Eurozone. As well as exports being hit by falling Chinese demand, the recent emerging market currency crisis in places like Turkey has also weighed on growth. But with the ECB introducing new long-term loans for banks and pushing back its rate hike expectations, investors have been warming towards European equities of late. Still, the markets face a few major risks, which among other things, include:
• Potential for a disorderly Brexit
• Possibility of US-China trade talks breaking down (not to mention the positivity being nearly price in)
• The imposition of more tariffs on European exports by the US
• Further economic slowdown in Europe
• Profit-taking after big gains
Q1 U.S. earnings being more disappointing than expected, with mavens at FactSet predicting S&P 500 Q1 earnings to be down 3.4%, which would be the first year-over-year decline in earnings since Q2 2016. According to FactSet’s estimates, the forward 12-month price to earnings ratio for the S&P is 16.0, which is below the five-year average of 16.4.
So, investors are faced with elevated levels of risks as we head towards the first quarter reports. While the recent falls in bond yields amid the prospects of interest rates remaining low for longer may keep the downside limited, I am skeptical that the gains we have seen so far this year can be repeated in the upcoming months. Above all, there’s the potential for profit-taking with indices looking a little overstretched again.
Source: TradingView and FOREX.com
