Key Talking Points:
- Global stocks rally as US earnings push back stagflation concerns
- Investors must be aware of inflation effects in different sectors
Global stocks have rallied significantly in the last two sessions as upbeat sentiment returns to markets. Continued growth in earnings from major US banks and asset managers have seen investors take a break from concerns about growth and stagflation, focusing also on improving jobs data and a small decrease in the rate of growth of PPI.
But traders must remember that we are only into the first few days of the Q3 reporting cycle and financial companies are likely the least affected by the rapid growth in consumer and energy prices. Therefore trading is likely to continue to be choppy over the coming days as we get more insight into how profit margins have held up in different sectors, all whilst energy prices continue to reach new highs. Ongoing concerns about faltering demand and supply constraints could bring on another pullback in the short term, but for now markets seem to be very much risk-on.
The S&P 500, which is a good indicator of overall market sentiment, is up almost 3% since Tuesday, lingering around the 4,450 mark. The pullback since the beginning of September has been just what markets needed to attempt a new leg higher, with the RSI now showing further short-term bullish momentum building towards 4,500.
S&P 500 Daily Chart
European stocks are also seeing dip-buying into earnings season, with the DAX 40 managing to break above its descending trendline resistance and the FTSE 100 at 20-month highs. The German index is also above its 200-day moving average which is likely to offer support at 15,085, whilst the 100-day and 50-day averages are converging around 15,598 and could become an area of resistance to overcome. The important test is going to be whether the DAX can hold above 15,400 over the coming days, which would set the index in a good position to reach the 15,600 mark.
DAX 40 Daily Chart
The FTSE 100 is finally attempting to break out of its 6-month range between 6,890 and 7,200. The push higher this week has built bullish momentum going into the second half of the month but the stochastic oscillator is starting to near the 80 mark once again on the weekly chart, meaning that a break higher could be in jeopardy if momentum stagnates once again. I’d be aiming for a break above 7,365 to consider the move away from the 6-month range complete without risks of falling back in.
FTSE 100 Weekly Chart
— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin