Equity markets have been beset by significant volatility in recent weeks. The huge sell-off of mid-August lasted a couple of weeks but the ensuing recovery since has been extremely difficult to call due to its sharp swings. Since the “bottom”, markets have been flying around in each direction, with investors unable to gain a foothold in a sustained recovery. But with the market looking to breakout this morning, there are a few signals that this recovery in equities could be coming.
Overnight we had news that as part of its “Three Arrows” program to generate sustainable growth in Japan, the Japanese government led by Shinzo Abe was ready to cut corporation tax by 3.3% in 2016. The Nikkei 225 subsequently soared higher with a jump of 7.7% on the day. Sentiment in Asia was also helped by speculation that the People’s Bank of China is ready to engage more monetary easing (in addition to reports that the pension funds are buying up equities).
This has all helped to drive the US 10 year yield higher (which is a reflection of improved growth prospects, and that the copper price is now progressing strongly in its recovery. This market is now looking to complete an upside break above resistance at 2.230%.
Additionally, we have the improvement in base metals prices in the past few weeks. The chart of copper is below and this improvement has been helped by the announcement that mining giant Glencore would be taking two of its African copper mines offline, which Citibank suggests there will be a shortage of 284,000 tonnes in 2016 which has also helped the price sharply higher today. Copper has broken its big downtrend and this can only be good for not only the share prices of the embattled basic resources sector but also for those analysts who like to refer to the term “Dr Copper” due to its apparent characteristics of an economic barometer.
So where does this leave the major equity markets. Well, they are breaking out today, although we need to see confirmation of the move. The DAX Xetra, CAC 40 and FTSE 100 all seem to be making an upside break above key resistance levels today. All have similar patterns which the bulls will be happy to see breaking higher.
The DAX has broken above not only the near term resistance at 10,380 but also the 61.8% Fibonacci retracement resistance of the 9216/12,339 rally at 10,428. The momentum indicators are turning far more positive , with a bull kiss on the Stochastics, the MACD lines with a bull cross and the RSI move also confirming a break. The FTSE 100 is looking for a close above resistance at 6248. Again, as with the DAX there are strong improvements with bullish crosses on MACD and Stochastics, with the RSI also recovering nicely now. It just needs the closing breakout above 6248 tonight. Finally the French CAC 40 which again has the same technical set up.
As we move towards the US session, the S&P 500 is also similarly set up, although perhaps the technical indicators are not quite as positive near term. The S&P 500 needs to breakout above 1993 resistance which could still act as resistance if the current implied open from the futures of +18 points are reflected at the open (suggesting an open around 1987). However, the performance of the European equity markets, rising US Treasury yields and improving copper prices suggest that market sentiment is improving for equities now.