A massive sell-off provides ground for buying

13 October 2014    Guest post by Jay Hawk at Orbex.

Last week’s sharp fall of the US stock market forces us to review our forecast regarding further market development, at least in the short term. If previously we were well anticipating a surge up to 2060-2070 points in S&P500 through October and November, then now, considering some changes in fundamentals as well as a heavy drop of 3% in the index prices, we expect to see US stock index consolidating in the 1900-1950 point range.

There definitely were reasons for a stock market decline; however, we cannot say these could lead to a lingering and more significant drop. The main argument for the sell-off was the news by IMF cutting its forecast for the world economy growth rate from 4% to 3.8% due to eurozone’s economic problems as well as fiscal risks in emerging economies. The general situation with risk appetite has been spoilt by the publication of discouraging macroeconomic news from China and Eurozone (including weak export data from Germany – export volume has dropped by 5.8%, the worst figure since January 2009) and the decision by Standard & Poor’s credit agency to cut Finland’s sovereign credit rating due to weak economc growth prospects. On the other hand, coming back to the US economy, we don’t see any significant changes in this regard. Current US Fed’s monetary policy, according to the Fed meeting minutes earlier this week, still does not presume aggressive rate hike – rate hike expectations have now moved to 2nd half of 2015 from the end of the first quarter 2015. Furthermore, we expect the upcoming US earnings season to confirm a stable growth of the US economy. Finally, as for US macroeconomic data, there is no cause for concern (jobs data, in particular, suggest significant improvement in the labour market). Summing all up, curent monetary policy expectations, start of the earning season as well as strong macroeconomic data – all these factors are in support of S&P500.

If we look at the significant appreciation of US Dollar, then here we do not see any problems either, as we believe this can make both US stock and bond markets more attractive as dollar denominated assets.  In our view, the current appreciation of the US dollar does not lead to any significant problems for the US export or GDP growth. On the other hand, we also favour some of the Fed’s officials (Lockhart, Dudley and Evans) who claim that the Fed should not hurry with a rate hike at times of such rapid appreciation of the US Dollar.

Before the Fed’s meeting minutes earlier last week, we were expecting that up until October 28-29 there would be an intrigue in the market regarding expectations of „considerable time“ wording removal from the Fed’s statement, which presumes a more delayed tightening of the monetary policy. Now this is out of question and hence there is ground for the S&P500 rise in October.

From technical analysis perspective, inability of S&P500 to close above 1900 point level by the end of Wednesday trading session, October 15 (the date of CPI data publishing in the US), would force us to reconsider a bullish view and instead prepare for testing the 1860 point support.

 

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