17/10/2014: Have we reached the bottom?

Markets have rallied off the lows so now the inevitable question will be asked: “Have we reached the bottom now?

Well, the sentiment has certainly improved. First of all, equities are sharply higher. The FTSE 100 is 180 points (or 3%) off its lows, whilst the DAX is as much as 4.5% off its lows. Safe haven yields are rising again, with the US 10 year Treasury yield up from 1.87% at its nadir to now stand at 2.19% again, whilst the Greek 10 year having spiked to 9.28% this morning has now dipped to 8.15%. Furthermore, one of the key barometers of the market concern in recent weeks, the oil price, also seems to have formed a low for the time being. A bullish key one day reversal has been followed by a further 1.8% jump so far today.

The bottom   17102014

 

The problem is that it is very difficult to know if this has been the low. Not much has changed fundamentally in the past 24 hours that would generate “the low” in the markets. Politicians in Europe continue to argue over the best path to recovery. The Germans (such as Merkel and Weidman) staunchly believe in no monetary stimulus and tough fiscal conditions, whilst Draghi and France come from a completely different point of view. Whilst this continues to be the case, Europe will continue to struggle.

However, maybe the glint of light has come from the US. Disappointing US data on Wednesday caused fear to spread through financial markets, but yesterday’s weekly jobless claims and industrial production were strong and countered this fear. Also supportive comments from Bill Dudley (a dove on the FOMC but also a non-voting member) suggested that the path of tapering was not set in stone.

Interestingly also, the gold price is stumbling in its recovery, coincidentally right around the resistance of the key June low at $1240.60. A falling gold price would also point towards a reversal in the safe haven demand of the past couple of weeks and should suggest improved risk appetite.

With European equity markets higher today, Wall Street futures are pointing to a strong open today. The S&P 500 is set to open around 25 points higher (1.3%). The focus will turn to the housing data at 13;30BST and the Michigan Sentiment at 14:55BST which could provide further support is the recent trends in the data continue.

The euro is finding support above $1.2700 to maintain is slightly positive bias, whilst Dollar/Yen is also rebounding towards the resistance band 106.65/107.50. However, the Dollar Index is now incredibly messy in its near term outlook, reflecting the volatile consolidation seen over the past few days continues. The uptrend of the last 3 months has been decisively broken and the dollar has also fallen below its 21 day moving average which suggests a slightly corrective outlook now for the dollar.

DXY   17102014

So, have the markets bottomed? Unfortunately it is too early to say with any conviction, but the early signs are positive. The real test will come once the rally subsides and there is another bout of selling pressure. If the support that is forming gets wiped out without any thought then the roller coaster and volatility will continue.

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