Dow creaks as skies darken

Trade talks look dicier as the global economy stalls.

Et tu BoE

The short version of the near-term global stock outlook is that there are key regions where macroeconomic signals are persistent, but many other key drivers of sentiment are ambivalent. If anything, central bank guidance became more accommodative this week after the Bank of England went beyond Brexit uncertainty to note that tighter global financial conditions and negative trade conditions “contributed to a faster deceleration in activity”. It joins a Fed that was pressured into patience by winter volatility and a BoJ fast running out of levers as minimal price growth of recent years evaporates.

Any talks welcome

Yet the flimsiness of one of the more constant upsides since the start of the year also now appears to have been remembered. A drip feed of promising commentary from Washington and Beijing opened a window for a market-friendly outcome in substantive negotiations next week. But the White House’s announcement that talks at the highest level were unlikely before 1st March undercut those chances. Still, seniority of talks has graduated predictably, and timing was always tight. As such, Friday’s news isn't a major surprise and investors should still take well to any success of lower level talks by March.

‘Darkening skies’

The half-way house is an uncomfortable one nonetheless and indecisive market behaviour is evident on Friday as it’s been for much of the week. The convergence of “darkening skies” (per the World Bank) and worsening chart indicators is consequently coming into sharper focus. The line of least resistance could still be a resumed outperformance of U.S. indices, backed by still-impressive economic prints. Yet price charts aren’t offering much that’s definitive yet. With U.S.-China negotiations the top variable and likely to evolve over months, not weeks, investors are unlikely to have a better handle on whether ‘risk’ is ‘on’ or ‘off’ next week than in this.

Thoughts on Dow future’s technical chart

On a technical basis, the Dow Jones Industrial Average, like counterparts, is running into challenges after January’s confident upswing. Most proximate, a confluence of corroborated support, the 200-day moving average and the principal Fibonacci interval, 61.8%, referencing the early October-Boxing Day swoon. (Fib: 24857; 200-DMA: 25000, horizontal: 24898). Dow futures broke above the complex at the start of the week, before culminating with an (imperfect) ‘evening star’ pattern (no gap). The reversal flavour is clear enough. Buyers should now be on tenterhooks that the complex  could soon give way. If so, it would break below a triangular structure at its apex with some force. Kickbacks within 24200-24080 over the last few months could subsequently come into play. But support has been most credibly observed only as far down 23283. Momentum oscillators also favour a downturn in finer trend. (The chart below uses the Stochastic Momentum Index). Dow could escape lower levels by exceeding its 25350 3-month high from Wednesday, and soon; a tough ask.