Last week was dominated by politics, from the attempt to recuperate from the North Korea tensions, Charlottesville, and terror in Europe.
The S&P 500 extended a second-week of losses at 2.07-percent, its worst two-day fall since February 2016. It appears that even after seven months of no cohesive agenda, investors are still holding onto to the notion of reflation under President Donald Trump. The market narrative attributes most of last week’s losses to a reduced likelihood of Trump executing his agenda after receiving backlash to his Charlottesville moral equivalency statement.
The FOMC minutes from the July meeting revealed key topics among the policy makers: is the inflation impotency temporary or a long-term problem, and what are the implications for the interest rate path? The end result is that the Fed raised rates twice this year, with a possible third on the way. That doesn’t change the economic trajectory.
Investors are keenly aware that any uncertainty expressed by the Fed will compound political hesitation.
Broad-Base Expansion In The EU, But Monetary Policy Uncertain
While economic data has been strengthening in Europe, confirming repeated reports of the non-US market’s advantages—economically, politically and from a valuation perspective—ambiguity across the EU is creating significant potential for market volatility.
The European growth rate is catching up with the US at almost 2.5 percent. Germany was not the only country pushing Europe’s growth; rather, it was joined by the Netherlands and even Italy—after recovering from the verge of a banking crisis. This broad-base expansion provides a more reliable trajectory of further expansion for the Eurozone.
The DAX has been trading in a short-term falling trend since June 20. On August 11, it bounced off the uptrend line since June 24, 2016, the day the Brexit vote results were revealed. The significance of this uptrend line is confirmed by the 200 dma (red) that is retracing it.
However, although the price found support it stopped short of overcoming the short-term downtrend line and has since turned back down. A further bearish indication was the dead-cross execution, when the 50 dma (green) crossed below the 100 dma (blue) on Friday.
The price is fluctuating, and is looking for an opening for the price to move into; either the short-term downtrend line – with a break above 12400.00 – or longer-term uptrend line – with a break below 11800.00.