An invisible hand lifted the market, but it was not in the spirit of Adam Smith

An invisible hand lifted the market, but it was not in the spirit of Adam Smith

08 March 2021 from Carlsquare

Some days there are no visible explanations for why the stock market reacts the way it does. Friday, March 5, was one such day. Fed chief Powell did not deliver at all what was expected on Thursday, which caused the market to back down. This movement first looked set to continue Friday, with further force from a better-than-expected US job figure, which also spoke against new support. But then the markets were lifted, seemingly without logical explanation. This turnaround began exactly when the European stock markets closed. To the conspiratorial, it looks like an invisible hand is coming in and lifting the market, such as the mythical PPT Plunge Protection Team, which is an almost informal group to the president of the United States.

https://www.investopedia.com/terms/p/plunge-protection-team.asp

We do not consider us to be at this level yet where the PPT needs to be convened. On the other hand, we are more convinced that the desk at the New York Fed, which handles the Fed’s actions in the market, is happy to use behaviors to take advantage of these.

Last Friday there was this opportunity. The graph above is complicated and contains several layers of information. The rise in the Nasdaq was broken quite clearly when interest rates rose. The market began to focus on value stocks instead of growth stocks. Above all, it is growth shares in companies with negative results that take a beating in this market. This is since it is the investors’ cost of capital increase when interest rates rise. 

Technically, the MA lines have begun to break. This is a warning that the market may switch from rising to falling in the long term. Also note that it may have created a head-and-shoulder formation. We have previously pointed out that this was triggered and that it, mechanically speaking, could mean a decline to MA200, i.e., the purple line currently at 11 673.

But also note that Nasdaq have fallen in two rounds, each of around 565 points. Technically, this is a symmetry that can show that the decline is over in this phase. Also note that the index bounced at Fibonacci 50.

We do not have to be more than excessively conspiratorial. There was no fundamental reason for the market to bounce. Technically, it was oversold. We stop there in the analysis before there is something more tangible to go on.

 

This is thus the opposite of Adam Smith’s invisible hand, which aims for the economy to function as an invisible hand if free capital flows are allowed.

What the markets must look forward to is a long line of central banks that will make interest rate decisions in the coming weeks, and who think it is completely legitimate to intervene in the market on a recurring basis.

Australia stands out as a pioneer in the fight against raising interest rates. Australia is dependent on the mining industry and, like all other countries, has been affected by Covid-19. Now the country has also taken a fight with China, which is reducing imports from Australia. That puts further pressure on the country. Australia has made two official interventions in the fixed income market.

An interest rate decision from the ECB will be issued on 11 March, i.e., on Thursday this week. In the EU area, Italy is worst off due to a limping GDP and a rising national debt. We do not believe that there is much room for maneuver in the Italian economy. However, you should expect that Mario Draghi, as the newly appointed Prime Minister of Italy, is already pushing hard for Christine Lagarde to open her wallet for the Eurozone countries.

The next Fed meeting is the following week, March 16-17. Then updated forecasts will also be presented from the Fed. The speculations will be innumerable until then.

Inflation expectations are pushing away in the US, which is pushing up interest rates.

There are lot of discussions about where the pain threshold is for the interest rate level. There are two answers for this. One is that no one obviously knows. It is like when a pond is emptied of water- exactly at what level will the corpses float to the surface? It is only when there is a shortage in a larger company, fund, or country that you know where the pain line goes. It is only then that the panic really spreads, and every company, country and individual begin to think on holding on to their own money. This is when they know that a pain threshold has been passed. It is difficult to know whether the central banks have the power to push so much money into a new wave that this can be avoided or whether panic must arise first. Right now, one can always blame that Covid 19 is so exceptional that it goes before all other considerations.

The 10-year government bond yield in the United States has passed the first line in the sand, namely 1.5 percent. Note the candle on Friday which showed a sharp initial rise. But also, how the buyers of bonds came in later in the day and pushed down interest rates.

Above is the weekly graph for the 10-year US interest rate. Technically, 2 percent is a given next milestone for interest rates. This is since it is both an old level and the MA200 is there. If interest rates rise to 2 percent, the spring could be difficult for the stock market, which will be torn between hope and despair.

Expect higher volatility in the future. The VIX index which reflects anticipated volatility over the next 30 days, has become more volatile in recent times. Above is the 60-minute graph for volatility.

The daily graph is clearly trending upwards.

The long monthly graph for the 10-year US interest rate shows a clear correlation between interest rates and volatility. When both rise, they collectively point out that invested capital becomes more expensive. The only way the central banks can influence this is by squeezing more capital into the system. The easiest way to do this is to buy bonds. Politicians are ignorant and have left all management to the central banks, so there is no natural control function that works to stop today´s politics. We must therefore expect it to go to the end of the road. It is completely impossible to calculate where that end is today. Therefore, expect continued economic stimuli on the one hand, and a large underlying concern on the other hand…We expect that the stimuli will outweigh the concerns. But always be close to the exit and play with your face facing the window!

The S&P500 index has broken the narrow rising trend but clings on to a second rising trend channel:

In the hourly graph, The S&P500 index broke below the support level but managed to recover this on Friday 5 March. It was a strange movement. Note that the MA lines are trading downwards.

The FANG company shares are under clear pressure but managed to close of MA100 on Friday:

The Amazon's share break of the wedge looks in retrospect as a clear signal to which the entire market was heading. Can Friday's bounce at the old support level give a signal of a turnaround?

 

The Tesla share slips further down towards the old support at 500 USD.

 

The OMXS30 index has room left for the rising trend line:

 

The German DAX is getting closer to a support. Note a clearly falling momentum:

Brent oil closed last week right below 70 USD/barrel. Is the 75-level next?

However, the USD is strengthening against the euro. Note that the currency pair EUR/USD is now trading at a support and MA200 is meeting up right above 1,182:

 

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

08/05/2021 14:16:54

 

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