Equities
Equity Headwinds The bout of global risk aversion currently engulfing equity and bond markets alike obviously left us a little concerned about our bullish views of European and Japanese stocks last week. And we still are, of course. However, we first promoted the FTSE at 4,600 and the Nikkei below 12,000, so we have some breathing space. Still, the fact remains that if the Fed overdoes monetary tightening, equities are in for a rough ride.
Still, we are not bailing out just yet. The strong end-of-week close by the US bourses is likely to herald a bounce for equities, at least in the short-term. Beyond the short-term, key for the Dow Jones will be to overcome resistance at the 10,350 mark.
With regards to the FTSE, there are now several conflicting forces at work. As we argued earlier, we think the US economy proves resilient. Yet, we are somewhat concerned by the UK economy, although we feel that the Bank of England will cut rates at some point over the coming months, which will help matters. For now therefore, because we adhere to the short-term bounce theory, we maintain our bullish view of the FTSE, but are willing to alter this standpoint quickly. One level to watch is major trendline support at 5,200. A break below this point would be a large warning signal.
We adopt a similar attitude towards the Nikkei. A break of key support at 13,200 would cause us to turn short-term negative towards the Japanese bourse. For the moment, however, the uptrend is still in place, and any break above recent highs at 13,800 would signal further medium-term gains towards the 15,000 area.
Fundamentally, we are more bullish the Nikkei than the FTSE. Japanese money supply is accelerating, while bank lending is rising. In addition, the Bank of Japan’s (BoJ) monthly economic assessment shows most sectors of the economy as improving, highlighting a rebound in exports and a modest upturn in business sentiment.
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