Serious market events ahead for S&P 500, FTSE 100, DAX and Nikkei

Talking points on the fundamental forecasts of the S&P 500, FTSE100, DAX 40 and Nikkei 225:

  • Liquidity to reverse course this week to next as the US Thanksgiving holiday season brake lifts on both US and global markets
  • Next week’s economic calendar is packed, including key inflation stats, economic activity readings and the ever-popular NFPs
  • Overall ‘risk appetite’ trends have picked up, but this seems more supported by unreliable seasonal norms than the actual fundamental backdrop

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Fundamental prediction for the S&P 500: Bearish

Liquidity will return next week in a market that has seen both a seasonal and a structural suppression of volatility. As we head into the year-end holiday season, which typically amplifies expectations of a gradual reduction in activity and attendance, there is no guarantee that calm will prevail. Indeed, given the unresolved and converging threats of rampant inflation, the risks of recession and the lagged effect of the rapid tightening of financial markets; maintaining enthusiasm can prove increasingly costly. For the S&P 500 benchmark, the most heavily traded index by the world’s largest market, the decline in implied (“expected”) volatility mirrors the choppy rebound over the past six weeks. There are corrections in prevailing trends and there have been glimmers of support from headlines such as the considerable enthusiasm following the slightly softer pace in the CPI earlier in the month or this week’s FOMC minutes reiterating that a stronger pace is likely. slow of increases. That may be enough to stretch a little more, but it doesn’t form the basis for a serious rally going forward. From next week’s US ledger, there are data points like the PCE deflator (the Fed’s favorite inflation gauge), the Conference Board’s Consumer Confidence Survey, and November NFPs that could get some attention. However, the odds that the data could significantly lower the Fed’s terminal rate or ensure that we avoid a recession are slim. This skews the potential impact of data restoring the prevailing downtrend versus stocks projecting relief.




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Daily -2% 4% 1%
weekly -15% 19% 1%

Chart of the S&P 500 overlaid on the VIX Volatility Index (weekly)

Chart created on Tradingview platform

Fundamental prediction for the FTSE 100: Neutral

In just a few weeks we have seen the Bank of England warn of a painful recession in the UK, the Chancellor of the Exchequer issue his own economic warning alongside a tighter budget, and the OECD warn that the world’s fifth largest economy was facing problems. internal and external (energy costs) pressures. However, you wouldn’t get that impression if you were just looking at the FTSE 100. Using an indicator more popular in the US, I overlaid the UK index with the 10yr/2yr Gilt yield spread as an investor monitored measure of economic forecasting. This is not a common measure for UK markets, but the concept is similar. Barring the “mini budget” fiasco in September, the general recognition of the economic constraint going forward is increasingly manifesting itself in the pressure behind the longer duration document. Can the market continue to challenge this generally expected trend towards economic hardship? The economic ledger won’t offer many planned provocations beyond housing inflation, consumer credit levels and a report on private retail sales. This could leave the market open to drifting global sentiment or unpredictable stock foraging.




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of customers are net short.

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Daily 1% 2% 2%
weekly -19% 22% 10%

Chart of FTSE 100 overlaid on UK Gilt Yield Spread 2-10 (weekly)

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Chart created on Tradingview platform

Fundamental prediction for the DAX 40: Bearish

As striking as the disparity in equity performance and economic projections is for UK markets, I think the contrast with major continental euro area benchmarks is in a category all their own. While the German DAX 40 is further off its year-to-date highs than the FTSE, the 7-week, more than 20% gain for the former suggests optimism that is far removed from the overall fundamental backdrop. The OECD’s harshest warning about the economic threat in 2023 was given to the Eurozone, even though the official forecast is for a tepid 0.5% growth corresponding to the United States. The same group had also called on the ECB to close the rate gap with its US counterpart to check that inflation does not get even further out of hand. From next week’s ledger, we have inflation data from the Eurozone and Germany, regional sentiment surveys and jobs updates. Were we to record the impending recession in these data, low confidence could start to seriously falter.




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of customers are net short.

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Daily -7% 10% 6%
weekly -11% 18% 11%

Graph of DAX 40 overlaid on Eurozone 2-year bond yield (weekly)

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Chart created on Tradingview platform

Fundamental prediction for the Nikkei 225: Bearish

Japan’s local capital market can be somewhat insular. While still open to the ebb and flow of global sentiment, there has been a brake on the severity of the ‘risk off’ particularly with 2022. This is aided by a local investment appetite that rewards higher capital gains potential than the line inexorably deflated yield base that can be found in the financial system as the Bank of Japan has delivered on its commitment to keep interest rates pegged to its virtual zero. That said, capital rotation within the system cannot keep markets rising forever. Should there be a significant drop in global sentiment that prevails over year-end seasonal expectations or if Japan’s economic brilliance fades, we could see the Nikkei 225 not only falling back towards the bottom of this year’s range (down to 25,150 – 24,500), could actually push the index into “bearish” territory that it has so far been able to avoid. For maximum event risk, the Japanese ledger will offer retail sales and unemployment on Tuesday, industrial production and housing starts on Wednesday, and Q3 capital spending on Thursday.

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Chart of Nikkei 225 overlaid on USDJPY exchange rate (weekly)

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Chart created on Tradingview platform

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