Key Talking Points:
- Energy shortages, rising price expectations, and higher yields weigh on global stocks
- DAX 40, S&P 500, and FTSE 100 setups
European stocks are trading a little softer this morning after yesterday’s positive sentiment has been reversed. US futures are also trading lower this morning as US yields continue to rise for thr fourth day in a row, with the US 10-year yields trading at a 3-month high above 1.54%, bringing up government borrowing costs after last week’s hawkish message at the FOMC.
Inflation differentials are also shooting up, reflecting bond market expectations of future price rises, with the UK 5Y5Y rising to its highest levels since before 2008 at 3.9%. It’s not really surprising given recent energy shortages have caused gas prices to shoot up, spilling over into oil markets, with crude trading at $80 a barrel for the first time since October 2018.
But fears are also creeping in about a spillage effect into other parts of the economy, with production lines in China already being affected by power shortages, which could further dent the recovery in global supply chains. So far the narrative about higher yields doesn’t seem strong enough to shy investors away from stocks, but there is plenty of uncertainty out there to see last week’s pullback given a little more fuel.
The DAX 40 suffered another rejection off the descending trendline resistance yesterday bringing it down to a two-month low just shy of the 15,400 mark. Momentum indicators are starting to show worrying signs about the continuity of the year-long bullish trend, with SMAs starting to see bearish crosses and the RSI tilting downwards, currently resting just below 45. Straight up ahead is the 200-SMA which will be a good test of support for the German index, which has only dipped below this line in two occasions since achieving to hold back above it in June 2020 after the pandemic dropdown.
DAX 40 Daily Chart
The S&P 500 has been unable to get back above its ascending trendline support despite a solid attempt from buyers last week. US equities also have added pressure from failed attempts from Washington to pass a new budget by the end of September, and tech stocks being hardly hit by rising treasuries yields. The index is showing further signs of weakness but there are a few good areas of support up ahead so I wouldn’t be too concerned as long as buyers are ablet o keep price above 4,300 over the coming days.
S&P 500 Daily Chart
The FTSE 100 has fallen through a key support and is now trading outside of its recent confluence range. Up ahead the 7,000 phycological level looms which could offer some short-term support, especially as it may be underpinned by rising oil prices. That said, the energy crisis and subsequent shortage of supplies in the UK is likely to dampen sentiment in markets, adding to the pressure from rising yields on UK bonds, so the FTSE 100 may be in for a further pullback towards 6,900, where the 76.4% Fibonacci level holds.
FTSE 100 Daily Chart
— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin