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Stocks trade near 2022 lows

DJ chart 09 23 lt

Stocks are trading near major lows. Both DAX and DJ are fairly close to the levels where buying started in July. Therefore, the big question is whether institutional investors see this as a buying opportunity or whether they’ll wait for lower prices. While the proximity of major weekly support levels could lead to another attempt to push the stocks higher it’s worth remembering that the longer-term view on equities includes several uncertainties. Inflation, Russia’s war in Ukraine, China’s zero covid policy, the energy crisis and the hawkish Fed that’s ready to risk a recession are all significant negatives for both US and global growth. The latest addition to the list of risk factors is Putin’s threat of nuclear war against “the collective west” as he called it. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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The question is why should anyone own equities? There are those (e.g. Cathy Wood), that argue the Fed will change its stance and turn dovish sooner than is expected. This would rally stocks but a  weaker dollar could give a boost to the price of oil which in turn would help Russia to earn more money from oil exports. This would strengthen Russia’s long-term position in Ukraine and would probably make the war longer.

The Fed has always been and still is the 800-pound gorilla in the room. It has the power to move the markets even more than the war in Europe. Therefore the most important question is whether the Fed will turn around and turn dovish soon. In the past the Fed has been stubborn but who knows, perhaps a quick and sizeable drop in stock prices could turn the hawkish gorilla into a dovish one. Today’s main risk events include the PMI numbers from Europe and the US.

DJ chart 09 23

DJ – I expected to see a return move and we got one but it was much weaker than I anticipated. The sellers appeared well below the nearest resistance area (30465 – 30533) and now the market has once a gain created a lower daily high but couldn’t move into new lows either (signs of indecision). Below the 30465 – 30533 range the market is likely to move to 29760 while a break above the resistance area would probably move DJ to 30850 – 30880. That’s where a 50 SMA, the 38.2 retracement level and a descending trendline coincide.

DAX chart 09 23

DAX rallied and once again the rally was sold. The market created a lower high but also lost some downside momentum. The reason, I expect, is that the market is not that far from the weekly support level created in March and July this year. Yesterday’s low was only 0.44% from July’s low (12384.60). The lower highs in the daily timeframe are a technical risk factor for anyone considering longer-term longs against the weekly support level (and don’t forget the energy crisis or the Fed) but the market could still rally a bit even if eventually penetrated the support.

For the 4h trend to reverse the market needs to rally beyond 12783 and hold the levels above it (a quick peak above it would not do). In other words, the market remains bearish below the level. For intraday traders, the key price levels for today are 12443, 12519, 12641 and 12725.

USDJPY chart 09 23

USDJPY dropped like a stone and hit my alternative target (142.60) as the BoJ, for the first time since 1998, intervened and supported JPY. The market traded down to 140.35 and then bounced back to 142.60 before settling there for 8 hours. This could create a topping formation in USDJPY but the jury’s still out. BoJ would need to continue buying the JPY to fight the market trend otherwise the uptrend will resume. Often the government interventions are over quickly but it remains to be seen what the BoJ will do.

EURUSD chart 09 23

EURUSD is still trading below the 0.9864 low and would need to rally above 0.9907 in order to get a chance to challenge the resistance at 0.9945. Above the level, the next resistance is at 1.0050. Below 0.9864 my T1 is at 0.9760 and T2 at 0.9730.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US inflation rate dropped more than expected. The July reading (YoY) came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

  • EUR French Flash Services PMI
  • EUR French Flash Manufacturing PMI
  • EUR German Flash Manufacturing PMI
  • EUR German Flash Services PMI
  • GBP Flash Manufacturing PMI
  • GBP Flash Services PMI
  • CAD Core Retail Sales m/m
  • CAD Retail Sales m/m
  • USD Flash Services PMI
  • USD Flash Manufacturing PMI
  • CHF SNB Chairman Jordan Speaks
  • USD Fed Chair Powell Speaks

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta
Chief Market Analyst

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