Inflation or no inflation- that is the question

Inflation or no inflation- that is the question

17 May 2021 from Carlsquare

The market has been shaken up considerably over the past week on a theme that we have been nagging about for a long time. When inflation has hit the market, the anxiety will return. The broad rise in the stock market has been broken. But is the big journey over? We do not believe so. The central banks will not throw in the towel just because some hedge funds have started selling off shares in the market. Inflation will rise dramatically, but we believe it is for a temporary period. More important than ever is to follow developments in China, where the stock market suddently broke up last Friday. This at the same time as Chinese authorities warned that they will hit rising commodity prices – but it is unclear how.

The S&P 500 index has broken out of the rising trend but is now testing upwards after bouncing on MA50 where many bargain buyers went in. The S&P 500 managed to close Friday’s trading above both EMA9 and MA20, which is a good sign:

Note how nicely the S&P500 continues to dance on the MA200 in the 2-hour-graph. However, MACD is still in a falling trend. This gives support to the falling momentum in the daily graph.

The reason for the stock market not to move in the same direction as momentum can be found in the graph below showing the US 10-year government bond yield. Although the stock market took the theme of inflation fears extremely seriously and lowered growth stocks, especially IT companies with losses, the fixed income market has barely moved. Typically, the bond market is much better at reading what is really happening in the macro world than the stock market. The bond market consists in principle of 100 percent professionals, while the stock market has its charm in that a large part of the market is controlled by private individuals.

Below is tech-heavy Nasdaq that is currently testing MA50. A break above and MA20 may be next:

The Tesla share is under pressure and currently dancing on support in the shape of MA200 and Fibonacci 61,8:

Nor do the macrographs reflect the stock market´s concerns about inflation now. Below is the TIPS index, which is bonds that are inflation protected. If the market really believed in the inflation hysteria, the TIPS would explode in price. 

VIX, which reflects stock market expectations of volatility over the next 30 days, sank like a rock last Friday. It confirmed that it was a buy position at MA50. VIX gives a short buy signal now when it closed inside the Bollinger band after its latest outing. 

The single most important graph right now may be the US Dollar-index (DXY) balancing on the neckline in a potential head-and-shoulder formation. A falling USD is currently resulting in a rising US stock market, and vice versa.

Below is the EUR/USD. Since the euro weight the heaviest in the basket, the currency pair is thus trading almost inverted to the US dollar-index. As can be seen in the graph below, EUR/USD is trading above the rising MA20. There seem to be a relatively strong resistance around 1,2175:

But developments in China are also important. The Chinese stock exchanges have not kept up at all with the global stock market rise. This is since China, relatively speaking, has held back liquidity in the system. At the same time, China is dependent on imports, which has affected the country negatively when all commodity prices are rising. On Friday, the Chinese authorities went out and said that they would cut down on the rampant commodity prices, but it is unclear how. Commodities have nevertheless become losers in the last week. On Friday, China´s Shanghai Stock Exchange index also broke out of a wedge formation. Along with the USD, this is perhaps the most important graph to follow. If the Shanghai Stock Exchange Index continues to rise, it is positive for the stock exchanges globally. If this index breaks down, it is a clear warning signal.

The Copper price balances on EMA9. Note how MACD is about to generate a weak sell-signal. In case of a break to the downside, MA20 is next followed by MA50 where the metal bounces twice since the start of 2021:

The Boliden share is also correlating well with copper and is also testing EMA9:


OMXS30 index closed Friday’s trading above both EMA9 and MA20. But as in the US, momentum is falling:

The same is true for the German DAX index:

The Bitcoin exchange rate has faced a headwind since Elon Musk said that Tesla would no longer exchange Bitcoin for cars. Tesla would also not buy more Bitcoin until the problem with energy consumption linked to Bitcoin was solved.

The exceptional rise in Ethereum has also been broken.

Instead, it is other cryptos that have gained ground. Caradano is an alternative crypto currency where those who break them make more money if they keep the currency without selling it. KLAY is another crypto that uses much simpler technology to validate the currency and thus draws less energy. It has risen 40 percent in recent days.

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.

28/07/2021 10:22:41

 

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