Global Stocks Perky on Improved Data; Will It Last? - Analysis

Global Stocks Perky on Improved Data; Will It Last? - Analysis

2 March 2016, 12:23
Vasilii Apostolidi

Global equities marched higher Tuesday in varying degrees, underpinned by either solid data, or data that was not as disappointing as the market anticipated.

Traders debated whether or not these gains will be sustained and fretted that one bad data set, such as a downbeat non-farm payroll reading Friday, might spark a quick turnabout lower in stocks.

In China, the official China Federation of Logistics and Purchasing manufacturing PMI fell to 49.0 in February, its weakest level since November 2011, which was also 49.0 and missed the MNI median forecast of 49.

The headline reading suggested a very weak first two months of 2016 for the Chinese economy, but it was not all bad news.

The CFLP said in an accompanying statement that production, new orders and amount of purchase fell sharply in February because of the week-long Chinese New year holiday.

latest Caixin China General Manufacturing PMI showed that the headline reading fell further to 48.0 in February, its lowest level in five months and down from 48.4 in January.

After a sputtering start, the Shanghai Composite closed up 1.68% at 2,733.17, on the high side of a 2,688.757 to 2,747.562 range. At the close, the Shanghai Composite was down 22.8% on the year.

The index bottomed at 2,638.963 yesterday, stalling ahead of the 2016 low of 2,638.302, posted Jan. 27. The market will want to see the Shanghai Composite break back above a series of old peaks from last week in the 2,920-2,935 range before becoming more bullish.

In the eurozone, global investors cheered that the German unemployment rate fell to a low of 6.2% in February, the lowest reading ever for unified Germany.

Earlier Tuesday, Germany's statistical office Destatis reported that unemployment measured under ILO methodology continued to decline in January, to a new record at 4.3%. See MNI Main Wire story at 3:55 a.m. ET for details.

In addition, eurozone unemployment fell from 10.4% in December to 10.3% in January, below MNI's median of 10.4% and at the lowest since August 2011. This was the fourth consecutive decline in the index.

While overall Eurozone growth is expected to continue at a tepid pace of around 0.3% per quarter, stronger expansions in countries like Spain and Ireland could continue to keep downward pressure on unemployment, at least for several months, analysts say. See MNI Main Wire story at 5:00 a.m. ET for details.

In addition, EMU final manufacturing PMI for February came in at 51.2, higher than the flash reading of 51.0, but still down from the 52.3 level seen in January.

The German DAX closed up 2.34% at 9,717.16, after trading in a 9,9471.09 to 9,719.02 range. At Tuesday's close, the index was down 9.5% year-to-date.

Today's DAX high was the highest since Feb. 2's peak of 9,729.23, and the next larger resistance level will be the Jan. 28 high of 9,905.08.

The 55-day moving average, currently at 9,794.43, will need to be vaulted for a shot at the late January highs. The DAX last closed above its 55-day moving average on Dec. 30.

In U.S. action, the Nasdaq Composite was leading the pack in afternoon action, with the index up 2.46% at 4,670. The high of 4,671.278, posted earlier, was the highest level seen since Jan 13, when the index topped out at 4,713.981.

The Nasdaq earlier vaulted its 55-day moving average, currently around 4,668. The Nasdaq Composite last closed above its 55-day moving average on Dec. 30.

The Dow Jones Industrial Average was up 1.88% at 16,828, on the high side of a 16,545.67 to 16,852.30 range. The DJIA broke above its 55-day moving average last week but only closed above it Monday.

The S&P 500 was up 2.01% at 1,971 Tuesday afternoon, on the high side of a 1,937.09 to 1,973.43 range. At the peak seen earlier, the S&P was down 3.4% year-to-date.

The index earlier took out Friday's high of 1,962.96, was was deemed promising.

Nevertheless, a clear-cut close above 1,963 will be needed to test the next level of resistance at 1,985.32, which was the low seen Jan. 7.

There are also old lows in the 1,990-1,990 range from mid Dec and mid Oct, that will also now act as resistance.

The market will want to see the index decisively vault 2,000 before the "all clear" is sounded.

Global investors have taken comfort from the solid U.S. data seen on the day, as well as a sense that other global data, while not necessarily upbeat was not overly downbeat either.

U.S. construction spending rose by 1.5% in January above MNI's median of +0.4%, and February ISM data showed the headline purchasing managers index rose to 49.5 in February from 48.2 in January, which was above MNI's median of 48.5.

U.S. Treasury yields followed U.S. stocks higher and select commodities, such as oil, were buoyant also.

The CBOE's volatility index or VIX holds at 18.24, on the low side of a 18.00 to 20.17 range.

The VIX has flirted with its 200-day moving average, currently at 18.45, for the last 2 days and a close below the 200-day moving average would be deemed bullish for stocks.

The index last closed below the 200-day moving average on Dec 29.

The VIX has traded in "risk neutral" territory, i.e. over 20 and under 40, for most of 2016 and only in the past few sessions has been posting sub 20, "risk friendly" levels.

BOA Merrill Lynch strategists have lowered their S&P 500 EPS forecast for 2016 from $125 to $120 "to reflect lower commodity prices and slower global growth" and also announced their 2017 EPS forecast of $127, which is 8% below "current bottom-up consensus of $137.52."

The strategists assumed that "the impact of net buybacks (+1ppt), a stronger dollar (-2ppt) and declining Energy profits (-2ppt) will result in a net drag of 3ppt in 2016 vs. a drag of 10ppt in 2015."

Stripping out these factors, BOA Merrill's forecasts "imply a slowdown in non-Energy constant currency earnings growth from roughly +10% to +6%."

BOA Merrill estimates that "every sustained $10 per barrel decline in oil prices reduces S&P 500 by EPS by $1-$2, while every sustained 10% rise in the dollar represents a $3-4 drag."

The strategists pointed out that "if oil were to average $50 per barrel and the dollar were to end the year the year flat, it would add $4-$6 of upside (+3-5ppt)."

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