Equity markets - time to worry?

 The package of the data that was released in the US yesterday was mixed at first: initial claims came out lower than expected, sales of used homes declined and activity measure prepared by the Philadelphia Fed tumbled.

Home sales data confirmed a grim picture of a residential market but no one expected this part of the economy to be an engine of growth. Decline in claims is comforting as it might be showing the labor market isn’t suddenly shooting down. However, a second tumble in the row in the Philly Fed, preceded by a significant decline in the NY Fed suggests that the economy is losing momentum – probably with high prices of commodities (especially oil) hitting confidence among households and companies. Everyone got used to a lackluster labor market but investors generally expected the activity to remain strong (and eventually translate into higher employment).

Markets are still unsure how to react and that means there is a significant downside risk for equities (and for some commodities as well). Just few weeks ago we had a favorable picture of recovery running generally smooth accompanied by expansive monetary policy. Now the monetary part is roughly unchanged (the Fed is very remote from even considering QE3) but there are some question marks over a pace of the recovery. 

Technically, S&P500 futures remain in a declining channel, testing an upper limit of this channel at the moment. Should this resistance remain intact, the index ought to continue a decline along a possible wave C (a final wave of a running correction) towards supports at 1316, 1295 and 1272 pts. After completing this correction, an upward impulse wave should begin.

IEA calls for more supplies

The International Energy Agency said in a statement that there are growing signs that the rise in oil prices since September is affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates.

The statement’s hidden message for oil is bearish. Should high oil prices indeed contribute to a slowdown in a global economy, demand for energy will be reduced and subsequently prices might decline significantly. The message confirms our view that over a medium term downside risks prevail on the market of oil.

Events to watch – CPI and retail sales in Canada

Investors will need to wait until next Tuesday to get more puzzles from the US economy. CPI (7.00 ET, 13.00 CET, +0,6% m/m) and retail sales (8.30 ET, 14.30 CET, consensus +1% m/m) shouldn’t have an impact beyond USDCAD.   

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
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