Investing.com | May 15, 2019 11:32
European stocks and futures on the S&P 500, Dow and NASDAQ lost their grip on a rebound this morning, suggesting investors haven’t made up their mind yet on whether current prices reflect a reality characterised by the threat of an all-out tariff on Chinese goods that would also significantly hit U.S. businesses.
The STOXX Europe 600 once again retreated with car makers and telecoms.
In the earlier Asian session, regional equities consolidated a bottom after falling to the lowest levels since February, as U.S. President Donald Trump voiced his optimism on a trade resolution. Data showing China’s industrial production, retail sales and investments continued to contract re-ignited a pattern in which traders are bullish on expectations of further stimulus from Chinese policymakers—propelling the Shanghai Composite 1.91% higher and all the other benchmarks into green territory.
Hong Kong’s Hang Seng squeezed out another 0.52% advance after yesterday’s outperformance, when it benefited from smart money moving away from mainland Chinese holdings amid heightened tariff uncertainty.
h2 Global Financial Affairs/h2In yesterday’s U.S. session, stocks found their footing after Trump softened his tone. His openness to meet President Xi Jingping at the G-20 summit next month, coupled with speculation that the equity selloff has gone as far as it could, reinforced investor optimism, helping indices rebound from Tuesday’s selloff, which marked the biggest tumble—69.53 points, or 2.41%—since that of the pre-Christmas rout—70.04 points, or 2.9%.
However, we’ve repeatedly warned that trade and monetary policy headwinds will continue to inject volatility into the market and may thus unsettle complacent investors.
Even though volatility subsided along with the bounce, it remained within a pennant-shaped congestion. When price trades in that pattern, it contains an upward bias. That outlook is supported by the VIX’s bottom, demonstrated by the upside breakout, for the first time since the Christmas-eve rout and the exceptional rally that followed.
While all major U.S. indices found support above their March lows—an upbeat indicator now, though it could prove to be a bull trap, favoring bears in the development of an H&S top in the making—there was no consensus over the short-term outlook, as benchmarks closed well off their highs, except for the Russell 2000.
The S&P 500 advanced 0.8%, with Technology (+1.61%) doing most of the heavy lifting. Conversely, after outperforming during the rout utilities (-0.67%) stocks were the only ones to close in the red.
The Dow Jones Industrial Average notched a 0.82% gain. If traders were truly buying into Trump’s optimism on his negotiation prowess, the large-cap companies listed on the index—the most exposed to tariff headwinds—would have likely outperformed more clearly.
On the flipside, small-cap shares should have taken a back seat, having served their purpose well when investors sought growth opportunities that didn't rely upon foreign markets. Instead, they continued to outperform (+1.36%). Interestingly, these stocks have historically performed better during economically troubled times.
On the Dow, heavyweight Boeing (NYSE:BA) advanced 1.68%. With a 9.11% weighting in the mega-cap index, it had nearly three times the impact on it than the 1.73% Caterpillar (NYSE:CAT) climb.
Technically, however, we expect the rebound to be short lived, after completing a H&S continuation pattern, whose neckline was organically drawn by the 100 DMA. The 200 DMA failure to provide support reinforced the reversal.
In the meantime, yields on 10-year Treasurys fell to the lowest level since March, heading toward the 2.350 levels low before resuming the downtrend. The yen strengthened after completing a double bottom, and gold rebounded from an earlier dip.
Overall, trade developments seem to have put everything else on the back burner, forcing investors into the grip of continuous twists and turns in the market narrative.
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