Equity markets continue to grind higher
- Investors are seeing the glass half full: Recent higher bond yields and a stronger USD seem to be ignored, as equity markets focus on the positives of the stronger US economic data.
- Equities are higher again: Wall Street closed higher once more. US futures have remained supported overnight. European indices have continued to move solidly higher.
- USD has pulled lower this morning: The USD is unwinding recent gains on major forex. This is helping to fuel the early positive risk appetite.
- Positive risk also showing in Commodities: Gold and silver rebound, with oil also finding support.
A glass half full for equity investors fuels the gains
The strong performance of US economic data in January is leading equity investors to take a positive view.
They seem to be looking past the prospect of further rate hikes to focus on the prospect of a softer landing for the economy.
The US economy is proving to be resilient to the forces of a slowdown
The January data for the US economy has found a series of upside surprises. First Nonfarm Payrolls came in extremely strong, then US CPI was more sticky than expected. Most recently, US Retail Sales have shown strength in the consumer.
The data is proving the analyst community to have been rather pessimistic about the prospects of the US economy in Q1. Whilst it is still very early days, the January data points to decent growth potential for Q1.
This is helping to build the prospect of a softer landing for the economic slowdown expected in 2023.
The Atlanta Fed’s GDPNow estimate for Q1 GDP is currently over 2% annualised.
The US economy battled back against the forces of a slowdown in January.
Equity markets remain positive
If the performance of equities was strong in January, into February the moves can probably be best described as resilient.
The year-to-date performance of major indices in the US and Europe continues to grind higher. For now, equity markets seem to be happy to take a view that the glass is half-full.
The performance in February has been all the more remarkable as it has come amid the backdrop of a significant re-pricing of Federal Reserve rate hikes.
It has come as:
- US Treasury yields have rebounded sharply. The 2-year yield has added around +55 basis points (+0.55%) from its low of 4.04% to the current 4.59%.
- The USD has rallied strongly (the Dollar Index has bounced from a February low of 100.82 to around 103.60 today).
- Both of these moves should be a significant drag on US equity markets. However, there seems to be an appetite to continue to support weakness.
The question is whether this move can last. Profit-taking may become an issue again, certainly in Europe. The FTSE 100 is hitting all-time highs, whilst the DAX is pushing 12-month highs.
On Wall Street, the grind higher has been less impressive but has remained resilient.
Wall Street is solid whilst Europe remains strong
S&P 500 futures (SP500ft)
The technicals remain positive on US indices. The S&P 500 futures have held onto the uptrend channel of the past six weeks. Weakness continues to be supported.
- A series of higher lows continues, with the latest rebound from 4060 potentially a springboard for the next move higher.
- The rising 21-day moving average remains a strong gauge of support
- The daily RSI momentum indicator remains positively configured, currently above 60.
This is a market resilient to the downside for now. However, the bulls still need to break the shackles of resistance at 4208 to open the next leg of the recovery.
German DAX (GER40)
European indices remain strong, with the DAX one index that is leading the way.
- Another positive session for the DAX yesterday has pushed the market to test the recent 12-month high again at 15660.
- The 4-month uptrend is strong, whilst the 21-day moving average is also a good basis for near-term support.
- Daily RSI momentum is strong, again above 70.
The slight caveat is that the RSI above 70 has tended to mean consolidation and potentially near-term profit-taking for a pullback.
There is good support at 15240/15275 to buy into weakness. It would need a move below 14910 to change the outlook corrective.
Support and resistance levels for Brent Crude Oil, DAX Index, and more
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