An appropriate dampening of the market

An appropriate dampening of the market

29 November 2021 from Carlsquare

In this weekly trading note from Carlsquare, we elaborate on the following topics, indices, and stocks:

  1. An appropriate dampening of the market
  2. Upcoming economic indicators this week
  3. DAX below MA200 – is 15 000 next?
  4. Is the 2 200-level next for OMXS30?
  5. Swedbank is getting sweaty
  6. Not as much drama for S&P 500
  7. Will Amazon outperform in case of a rebound?
  8. Nasdaq at psychologically important level
  9. Demand for USD as safe haven was drowned out
  10. Brent is no longer flying

The world's stock markets fell sharply on Friday, November 26. It was mainly due to concerns about the Covid situation with the new omicron mutation in South Africa. EU countries, Russia, the US, and Australia, impose entry barriers towards South Africa. But there are already confirmed cases of people infected by new variants in, e.g., Australia, Belgium, the Czech Republic, Denmark, and Germany. Omnicron has arrived so quickly that the WHO has not yet had time to determine how dangerous it is.

As can be seen from the chart below, the decline was significant and broad on the European stock market indices on Friday and last week. The S&P500 and Nasdaq have fared slightly better (the stock market was closed on Thursday and half Friday due to Thanksgiving and Black Friday). The Shanghai index has fared best last week. So far this year, however, the Shanghai index has performed weakly, up only 2.6 percent compared to 15.6 percent for the world index. In the chart below, we can also see that only Nasdaq is in a major plus over the last month.

Stock Market Price development for ten indices last day, last week, and previous month

Source: www.di.se, www.marketwatch.com

The fact that governments are now reintroducing certain Covid restrictions is dampening economic growth to some extent. But protests against the Covid rules have also been quite widespread in Europe in recent weeks. Moreover, as we showed last week, about 70% of the population in Europe is vaccinated against Covid. The question is whether the current vaccines also protect against Omnicron.

One should also note that experts are talking about the omicron version being less severe than other versions. According to some sources, no one so far has been hospitalized (knock on wood).

Upcoming economic indicators this week

We are coming from a situation where the world economy is booming. The industry was affected quite significantly by component shortages and delayed deliveries in Q3 2021. A minor slowdown could alleviate this situation and slow down the current inflation rate. The latter also puts upward pressure on interest rates (although this has not materialized much, but perhaps on shorter expiries). Higher interest rates are the last thing the stock market wants because the return requirement increases, and P/E ratios should all else equal come down. Stock markets led by the S&P500 and Nasdaq have had a solid year. That a slowdown would come now, for whatever reason, was quite likely. Stock markets need to consolidate if they are to regain momentum before Christmas.

Looking at economic indicators such as the Eurozone Purchasing Managers' Index below, the November figure remained strong at 55.8, up from 54.2 in October. The levels are slightly higher than before Covid in January-February 2020. This week, on Wednesday, we get the November industrial purchasing managers' indices from India, Russia, Sweden, Spain, Italy, France, the UK, Brazil, and the US.

Eurozone Combined PMI from December 2019 to November 2021

Source: Refinitiv Eikon.

Another important indicator will be the US employment figures on Friday, December 3. The chart below shows the recovery of employment in the United States since April 2020. Stock market expectations are for 550,000 new jobs as of November 30, compared to an increase of 531,000 as of October 31.

US Non-Farm Payrolls cumulative changes from November 30, 2019, to October 31, 2021

Source: Refinitiv.

Expected lower economic growth is reflected in the US 10-year Treasury yield, which has fallen back from a peak of 1.68 percent on Tuesday, November 23, to 1.48 percent on Friday, November 26. The US 10-year yield has moved in waves in an interval between 1.4 and 1.7 percent since October 1.

US 10-year Treasury Yield April 20 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

DAX below MA200 – is 15 000 next?

For a change, let's start with the European indices. The German DAX fell close to 4.2 percent on Friday. Interesting is that the index closed below MA200 near its intraday low. If the selling pressure continues, the 15 000-level may be a reality relatively soon. However, the fear of the new version may have been fueled by some natural selling for profit-taking.

DAX graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, one can see how MA50, currently trading just below 15 100, serves as the first line of support:

DAX, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Is the 2 200-level next for OMXS30?

As for DAX, OMXS30 also closed under MA200 near its intraday low. Is the 2 200 next?.

OMXS30 graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

For OMXS30, MA50 in the weekly graph meets up at just below 2 215:

OMXS30, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Swedbank is getting sweaty

Outperforming banks were hit hard on Friday. That is also a sign of profit-taking fueling the significant sell-off. The Swedish bank SEB fell 6.7 percent, while Swedbank fell 5.1 percent. Swedbank also closed below MA200. The next level lies close to SEK 180, where the rising trend line meets up.

Swedbank share price graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, EMA9 was broken. MA20 is next currently trading at close to SEK 177:

Swedbank, weekly five-year share price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Not as much drama for S&P 500

With no known cases of the new Omnicron variant in the US for the moment, the S&P 500 index did not decline as much, even though the fall was pretty hard. S&P 500 lost 2.3 percent but is nowhere near its MA200. However, EMA9 and MA20 were broken. Next is MA50, currently trading just below 4 530. Perhaps the drama was held down given the low turnover during the half trading day on Friday.  

S&P 500 index graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, EMA9 seems to be still up for tango. In case of a break to the downside, MA20 is next currently trading around 4 495:

S&P 500, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Will Amazon outperform in case of a rebound?

Stocks in credit card providers such as AMEX and Master Card dropped significantly in New York trading. AMEX and Mastercard stocks lost 8.6 and 4.7 percent, respectively. Amazon was down 2.1 percent. But as shown in the chart below. MA20 is still up for tango. Black Friday was once again a record in terms of sales. In the case of improved sentiment, probabilities are suitable for the Amazon share to outperform.

Amazon share price graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, we can see an ascending triangle. This formation tends to break in the direction of the trend – to the upside:

Amazon, weekly five-year share price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Nasdaq at a psychologically important level

As S&P 500, Nasdaq 100 also fell below EMA9 and MA20. The 16 000 level is a significant psychological level. MA50 is next currently just above 15 540:

Nasdaq 100 graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, Nasdaq is still trading above EMA9, currently at 15 865:

Nasdaq 100, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Demand for USD as a safe haven was drowned out

Lagarde spoke on Friday. It was one factor likely to have contributed to the strength in the euro against the USD. Otherwise, given the situation, one might have thought that the demand for USD as a currency of safe haven would be substantial. Nevertheless, EUR/USD managed to close above EMA9. Next on the upside is falling MA20, currently at 1.142:

EUR/USD, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, EUR/USD managed to stay above the Fibonacci 61.8 level:

EUR/USD, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Brent is no longer flying

As flights got cancelled in the wake of Covid wave X, the oil price was at risk-off. However, as shown in the chart below, the sticky oil price got stuck at MA20:

Brent oil price graph, April 27 to November 26, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, one can also find relatively strong support around the 70 USD per barrel level:

Brent oil price, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Full name for abbreviations used in previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence

Important notice

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

27/01/2022 12:51:01

 

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