The market was quite bumpy yesterday, after slumping 80/90bps in the morning recovered some losses in the afternoon to close down around 35bps in Europe. Among the worst sectors in Europe Real estates while Utilities and Telecom lead the gains. Quite volatile performance on rates as well, with all curve flattening and each European country 10Y yields down 4/5bps in the morning, reversing in the end of the session to close quite flattish.
Asian markets again weak this morning, after the US House of Representative passed with 417-1 votes the Hong Kong pro-Democracy bill, following a similar response from the Senate on previous Monday. Now It’s up to Trump to sign this law which could really hit the US-China relationship as Xi Ping reiterated that America should not interfere in Chinese Geopolitics. However, in the morning China’s Chief trade negotiator said that he was optimistic about reaching the phase one deal with US as soon as possible. The odds of a positive resolution are now lower though.
In focus, massive reversal of oil with WTI up 3% following American crude stockpiles rising less than expected and inventories shrinking by the most since August (2.3 million barrels, the biggest draw in three months).
The FOMC minutes released yesterday were merely a non-event, as the Committee reiterated the support for a pause on interest rate policy and confirmed previous guidelines. Now the future Fed Fund rate probability of cutting in December is close to 0. Future steps likely to be affected by the next move in US-China trade war. In Q4 US GDP is tracking 1.7/1.8% so far, then positive outlook although with downside risks (tariffs etc.)
The market is showing several warning indicators. After more than 10% since early October, it’s quite clear that a rally can’t last forever, and as European stocks climb toward all-time highs, the risk of a pull-back is increasing.
The Bearish shooting star signal shows that a bearish technical pattern might be possible in the short run. Also combine this with stretched sentiment measures (AAII BULLBEAR +16) and increased equity positioning (US Street Prime Brokerage nets in 94%-tile on 12-month basis). It means everyone is long. s we said over our last updates, positioning has been shifting from light to heavy.
Eurostoxx 50 chart Bearish Shooting Star technical pattern
Nearly 30% of stocks within the S&P 500 have triggered MACD sell signal, similar situations have led to a correction for the market.
At the same time the short positioning on VIX (volatility futures on S&P Index) have a reached a new high. This is quite dangerous as it could easily led to a reversal and a spike in volatility (often associated with a market correction).
The DeMark indicator is now giving an important daily exhaustion/sell signal on the Eurostoxx future which should be further validated with a close below 3701 on Friday.Similar signals are present on the major indexes.
Another warning bell for equities could be given by High Yields as it is highly correlated. The iShares High Yield corporate bond Etf is not far from the support of the 200 day moving average… to be monitored as a breakout will be a negative message for the market.