The week just ended was the first since the beginning of the year in which the equity markets gave some sign of a pause in the negative trend hired since the beginning of 2016. This is stated in the latest report by Lupotto & Partners, the independent financial consultancy firm.
However, the technical situation has deteriorated on all indices, so much more is needed to restore confidence in purchases. Let's look at the world's leading index, the US S&P 500. The index closed last Friday at 1917,78 points.
The technical setup is unequivocally still bearish: decreasing relative highs and lows have formed, the moving averages are all oriented to the downside. However, the MACD oscillator now suggests a possibility of recovery towards the 2000 area, where the index will collide with the 100 and 200 day moving averages and could be rejected again downwards. New and exogenous facts will be needed to change the situation, for example a true one world deal for cutting oil production: so far we have seen attempts that are more superficial than substantial, moreover aimed at freezing today's quotas rather than reducing them. Or the FED could put the rate hike program on the back burner for some time.
The electoral year in the USA does not help investors to take decisive positions, we know that statistically it is a weak year for the markets, uncertainty about the outcome of the primaries has increased and the level of debate is at very low levels. I invite you to read a commentary by Alan Friedman which is downloadable clicking here.
In newsletter 146 on the 2016 scenarios, based on the calculation of the P/E of the companies making up the index, we hypothesized a level of 1700 points to which buyers could decisively return. This hypothesis in the light of the trend in the first two months assumes a greater probability. A change of scenario as already mentioned assumes that due to elements that have not yet manifested themselves, the index strongly pierces the moving averages and the resistance in the 2100 area.
That, moreover, the main problem for the US index is given by the lows energy prices it is confirmed by the comparison of the market's implied volatility indexes (the famous VIX) and the implied volatility index referring to the energy sector alone.
In August 2015, when the US index plunged on news from China of lower-than-expected growth and the devaluation of the Renminbi, both volatility indices spiked sharply. At the beginning of February, the volatility index of the energy sector returned to the levels of August, but this time it was not followed by the VIX index which grew much less pronounced. Now the difference between the two indices is about 16 points, a symptom of a strong malaise in the US Energy Sector.
We recall that the higher the volatility index, the more nervous the market is about that market.
On the front of the the Italian Stock Exchange, the worst since the beginning of 2016, the asymmetry that has been created in the banking sector after the entry into force on 1/1 of the bail-in rules weighs heavily, denounced by Italy in Europe and the subject of an in-depth article about Sun 24 Hours of Sunday 21/2 of which we report below a passage:
“While in Italy the bankruptcy legislation has always remained the same, other nations have arbitrarily modified the basic rules before the bail-in came into force. The reference model for most European countries (excluding Italy) has become the one already adopted in England, Switzerland and the United States: placing a holding company at the top of the banking operating company (the one that manages the network of branches). capital. In England, holding companies can thus play a key role in the complex resolution process: the idea is that when a large bank fails and its capital is written off, its bondholders bear the losses to recapitalize the bank and allow it to continue to use. In practice, not only are the legitimate fears of depositors curbed, but an alternative path to the one envisaged for all in the bail-in directive is created. So here is how the strong countries have neutralized the insolvency risk which is instead wearing down our banks on the stock market. In this sneaky scheme, banks issue unsecured senior debt to the holding company, which then transfers the raised funds to the banking operating company. In this way, the Holding owns the bank's debt, which can be canceled in the event of large sudden losses that put its assets at risk. At the same time, senior debt issued by the bank remains untouched. In short, the separation between the holding company and the banking operating company, with the former acting as guarantor for the bank's account holders and investors, has created a protective shield not only for shareholders and customers, but also for stock market prices.
The hope of the Sole 24 Ore is that there will be a period of suspension of the rules on bail-in to give time to all countries to organize themselves. In the meantime, volatility is likely to continue.
Brexit debate weakens Pound and GBP bonds
Last week he partially clarified the positions on the issue of whether or not the United Kingdom would leave the European Union. In Brussels, after 24 hours of heated negotiations, the twenty-eight component countries found a difficult agreement on Great Britain's future relationship with the European Union. Immediately afterwards, British Prime Minister David Cameron announced the date of the referendum in which British citizens will have to decide whether to stay in the Union or leave it; it will be June 23rd. At the same time, strengthened by the agreement, Cameron has spoken out in favor of staying, however leaving freedom to the exponents of his party and his government to also express different positions, something that has already happened with the Minister of Justice Michael Gove and with well-known Mayor of London Boris Johnson.
A period of uncertainty and indecision is therefore probable for the markets which will have to assess the impact and probability of an exit. At the moment the polls give the YES and NO very close to each other, but it is known that until the last moment these competitions are very uncertain and in the end the resistance to change often wins, as when the polls gave a certain YES at the exit of Scotland from the United Kingdom and then in the end the reasons for permanence prevailed.
In this phase, the last two months have witnessed a fairly pronounced weakening of the British Pound against the Euro: a first resistance to further weakening is in the 0,80 area and a second one around 0,84 where a trendline of long term that has already stemmed the movements of appreciation of the EURO on various occasions.
On the bond front, yields on GBP corporate bonds have soared in recent weeks, and the credit spread on sterling Investment Grade corporate bonds has jumped rapidly from 4bps to 150bps over the past 200 months.
The EURO/GBP exchange rate is likely to remain volatile in a wide range in the coming months depending on the sentiment on the referendum result. The exchange rate moved away from the lows of 0,70 was very rapid and the cross is now at 0,7725 which, combined with more attractive corporate yields than in the past, could encourage some buying by investors with a consequent benefit for the Pound in the short run.
