After a positive start to the week for global index futures overnight, European stock indices have extended their gains sharply by midday London session, led by the German DAX which was up 2.6% at the time of writing.
The other mainland European indices also rallied sharply, while the FTSE was up a good 1.3%, led by bank shares with HSBC up 9% on news its biggest shareholder raised its stake in the business. US index futures advanced alongside Europe, pointing to a higher open on Wall Street. However, the optimism in the equity markets hadn’t transferred to the FX markets entirely, with just the pound rallying sharply while the rest of the majors were relatively quieter.
Investors appear to be warming towards equities and other risk assets again. After all, ‘nothing has fundamentally changed so why not buy everything at slightly discounted prices again after the recent sell-off,’ is a question the bulls will be asking themselves. Central bankers have made it crystal clear that interest rates will remain very low for a long time to come and will be there to provide further support should it be required. The relatively low COVID-linked deaths mean investors are not showing too much concern towards rising virus cases. Instead, they remain optimistic over the potential approval of a vaccine soon, which together with ongoing central bank support will probably help accelerate the recovery. What’s more, we have had data showing profits at industrial companies in China grew for a fourth consecutive month in August, underscoring economic recovery signs. Sentiment has also been supported, among other things, by hopes that the UK and EU officials will make progress as a key week of Brexit talks begins. This may help explain why the pound was clearly the biggest riser among the major currencies this morning.
- In China, the world’s second largest economy, profits at industrial companies grew for a fourth consecutive month in August. They jumped 19.1% year-on-year in August, which means that industrial profits are now just 4.4% lower compared to a year-ago period. This represents a strong recovery from COVID-related slump as China’s recovery gained momentum with stimulus efforts kicking in. Meanwhile the latest purchasing managers’ indices (PMIs) from China’s manufacturers are due out on Wednesday. It is important we see continued strength in the PMIs to keep the bullish moment intact.
- The recent optimism surrounding Brexit talks suggest Boris Johnson is more eager for an agreement now because of growing pressure from his own party and the fact his approval ratings have fallen. The Prime Minister has been criticised over how he has handled the situation, causing unnecessary uncertainty at a time when the economy is already reeling from the impact of COVID. The Labour Party, led by Sir Keir Starmer, has secured a three-point lead over the Tories, according to a new poll by Opinium for The Observer newspaper. This is the first time Labour has been ahead of the Tories since July 2019.
- Last week’s sell-off may have just been a correction from overbought levels rather than a complete reversal in the case of indices, gold and silver, and an oversold bounce for the dollar. This view is supported by the fact bond yields didn’t change much. When something fundamentally changes, bonds usually move noticeably. Various government stimulus measures are still ongoing, while more fiscal and monetary stimulus could potentially be on the way. Last week, several officials from the Fed and previously from other major central banks have suggested that more stimulus may be provided, if needed. Central bank balance sheets have been swelling, as QE programmes have been running at full throttle again. There’s thus ample liquidity which continues to find its way into stocks and other risk assets after each rounds of correction.
DAX in bullish reversal
The DAX posted some bullish price action at the back end of last week when it repeatedly refused to hold, on a daily closing basis, below the low of Wednesday’s bearish-looking candlestick. That refusal clearly suggested the selling pressure was weak as dip-buyers stepped in to take advantage of this latest correction to bid the index higher, thanks to ongoing central bank support and recovery optimism. Now following Friday’s bullish price action, there has been some further buying evidenced so far at the start of this week:
ThinkMrkets and TradingView.com
It is important now that the DAX holds above Friday’s hammer candle at 12710/15 to maintain its short-term bullish bias as it rises to test overhead resistance at 12820. A break above the latter could pave the way for a run to 13031, the point of origin of last Monday’s breakdown. A close above this level would confirm the bullish reversal in my view.
However, if the DAX were to go back below 12710/15 area (hammer head) on a daily closing basis then this would represent loss of bullish momentum, which could then pave the way for fresh selling in the days ahead. So do watch that level closely on your favourite time frames.
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