DAX 40, S&P 500, FTSE 100 Setup: Stagflation Concerns Grow Despite Continued Stimulus
Key Talking Points:
European equities are looking to steady this morning after another round of losses in yesterday’s session led by weakness in the tech sector. Markets continue to suffer from fears that elevated inflationary levels will prompt central banks to reduce their stimulus measures just as global growth starts to show signs of stagnating. In fact, stagflation – high and persistent inflation coupled with sluggish growth – seems to be in the back of investors’ minds after Powell warned that price pressures could stay elevated longer than originally expected. A quick search on google trends serves to confirm that the search for the word stagflation has risen to its highest level in 5 years.
Google trend search for “stagflation” worldwide
Whilst these fears may be overdone for now, the risk of quantitative tightening is weight on stocks globally, with the NFP data out on Friday the missing piece in the Fed’s tapering puzzle. I would expect that once the Fed opens the floodgates, other central banks will follow suit, with the Bank of England already talking up its plans to start reducing stimulus in the economy.
The DAX 40 has been unable to hold above its 200-day SMA after suffering various rejections off a descending trendline resistance. As I mentioned last week, momentum indicators were starting to show signs of deterioration in the year-long bullish trend and the German index is now coming up towards some key tests of direction. Straight up ahead is the 15,000 mark, which has held off further losses so far, but I would expect sellers to pierce through this level as the next key support lies in close proximity, leaving a key area between 15,000 and 14,815 where the strength of buyer momentum will be tested. Below there, the index is exposed to falling back towards 14,415.
DAX 40 Daily Chart
The S&P 500 is no closer than it was last week at getting above its ascending trendline support. In fact, the area is getting further away as the days pass and the outlook for the index is looking weaker as it does. The long-term trend remains bullish for now as it was fairly overbought coming into this correction, but we may see some sideways consolidation if bearish pressure mounts whilst bulls have control. The 200-day SMA is a good area for short-term support, whilst a drop below 4,200 would likely signal further weakness ahead.
S&P 500 Daily Chart
The FTSE 100 has found support at the 7,000 mark and is now back within a key confluence area (7,032 – 7,122) that has been attracting momentum for the past 5 months. The stochastic is showing flat momentum going forward with a bearish tilt, and the 100 and 50 day SMAs are converging up ahead so I would expect buyers to struggle to consolidate gains above 7,100. The range seems pretty tight at the moment so I would expect some sideways consolidation from here, with the 76.4% Fibonacci (6,894) as a key test of bearish pressure.
FTSE 100 Daily Chart
--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
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