A market starting to worry and see risks

The market has had a lot to worry about lately such as negotiations on raising the US debt ceiling, rising energy prices and inflation, as well as signs of a slowdown in the economy and the outcome so far of the Q3 reports.

US President Joe Biden signed a law on Thursday night September 30 extending government funding until December 3, just hours before the midnight deadline. The law had previously been passed by both the US House of Representatives and Senate with bipartisan support. However, the US Congress must still agree on an increase or suspension of the debt ceiling before the Treasury Department's extraordinary measures to fund the government end on October 18.

Democratic leaders, continue to try to unite the party around an infrastructure package worth about USD 1 trillion. A group of liberal Democrats has opposed a vote on the package, previously passed by the Senate, because they fear it would reduce the chances of passing separate stimulus packages for healthcare, education, and climate action worth $3.5 trillion.

The industrial PMI figures for September came in weak on Friday for the Eurozone, at 56 down from 59 in August. Meanwhile, the corresponding US PMI rose from just under 60 in August to 61 in September. Values above 50 are considered as good, implying that the economy is expanding. However, the trend for the PMI figures has been downward since July in the Eurozone. The US figure broke the falling trend in August.

Industry PMI figures for the Eurozone and the United States from October 2019 to September 2021

Source: Refinitiv Eikon

The large indices has also been sold off. S&P 500 index fell back by 2.2 percent last week, with an upward rebound on Friday 1 October. In the same last week, the DAX and OMXS30 indices fell by 2.4 and 2.6 percent respectively. For September the S&P 500 index was down 3.7 percent, while the DAX and OMX fell back by 4.2 and 4.8 percent respectively.  The seasonal pattern where September and October tend to be troubled months on the stock market looks set to repeat itself. 

Ahead of the reporting season

We are now into October and less than two weeks away from the Q3 reports starting to come in. From a Swedish perspective, there will be a lot of focus on production disruptions due to shortages of, for example, semiconductors (mostly assignable to the automotive industry), but also logistics (predominate shipments from China) that cause delays in material deliveries. To that, we could add price increases on input materials. One question is how this will affect the operating margins of engineering companies.

Companies with the lowest gross margins due to a high proportion of raw materials in their production will likely be hit the hardest, such as appliances manufacturers like Electrolux. These companies also often have challenges to pass on price increases to consumers.

That said, the comparison with Q3 2020 when Covid restrictions prevailed will be easy to surpass for most companies.  This is also true when comparing Q4 2021 with Q4 2020. But thereafter, from Q1 2022 onwards, it will be more challenging to sustain earnings growth compared to the same period last year. The graph below shows a rapidly declining anticipated revenue and earnings growth for both S&P500 and Stoxx 600 companies for the coming quarters.  Since we are only some three months away from 2022, this ought increasingly to be discounted into the current share prices.

S&P500 and Stoxx 600: Y/Y-Revenue and Earnings Growth Rate Estimates Q3 2021 to Q1 2022

Source: Earnings Insight and Refinitiv I/B/E/S Data.

Ahead of the Q3 2021 reports, 56 S&P500 companies have provided positive earnings outlooks, while 47 S&P500 companies have guided down their earnings forecasts according to Earnings Insight. The sector with the most positive guidance is Information Technology. The trend compared to Q2 2021 is that fewer companies have provided positive earnings guidance for Q3 2021, while more companies are now providing negative guidance for the coming quarter.

So far, 17 out of 503 companies included in the S&P500 index have reported their Q3 results, with 82% of earnings and revenues being better than expected. But the reason why FedEx and Nike shares fell so sharply after the report was not so much the Q3 results as the outlook. For Q4 2021, analysts have revised down their earnings forecasts for these 17 S&P500 companies by on average 3.9%. In the case of FedEx, analysts revised the earnings forecast for Q4 by 14% and for Nike, they cut earnings estimates by 36% 

S&P 500 is clinging on to MA100

S&P 500 rose on Friday from a shart fall on Thursday, thus clinging on to MA100 still serving as support. On the upside, EMA9 need to be retaken before MA20 can be tested. On the downside, Fibonacci 38.6 can be tested if the negative market sentiment persists.

S&P 500 index graph, February 26th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph below, one can see how S&P 500 with little margin managed to close near MA20. However, note how MACD has generated a weak sell signal:

S&P 500, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Tech-heavy Nasdaq 100 managed to stay above MA100 as shown in the graph below. The next levels on the upside are Fibonacci 23.6 and a falling EMA9. Strong resistance can be found between the levels of 15 200 and 15 260 where MA50 and MA20 converge.  In case of continued negative sentiment, MA100, as well as Fibonacci 38.2 around 14 400, are the first two levels to keep an eye on on the downside.

Nasdaq 100 graph, February 26th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

As shown below, Nasdaq managed to recover MA20 in the weekly graph. Note a negative divergence between the index and MACD:

Nasdaq 100, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

OMXS30 recovered from weak opening on Friday

OMXS30 index is also clearly under pressure but got in a way saved from total failure by strong recovery after a weak opening on Friday 1 October. On the upside, Fibonacci 38.2 and EMA9 still needs to be broken before MA20 can be tested. On the downside, Fibonacci 50 and MA200 converging around 2 200-level, serves as support.

OMXS30 index graph, February 26th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

It is not a super happy sight when looking at OMXS30 in the weekly graph. EMA9 and MA20 have turned downwards as well as MACD:

OMXS30, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX bounced of MA200

DAX was trading below MA200 on Friday 1 October, but managed to recover. The next level on the upside is Fibonacci 38.2 followed by EMA9. On the downside, MA200 and Fibonacci 50 serves as a (strong?) support.

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, one can also see more clearly how the psychologically important 15 000-level should make up some sort of support level:

DAX, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Thank you for the recovery falling interest rates…

Obviously, interest rates, although also manipulated by the Fed's support purchases, are sensitive to signals of a slowdown in economic activity. The strong recovery on Friday can to some extent be attributed to falling interest rates in the US as well as in Germany and Sweden:

US and German 10-year yields, April 19th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

The US 10-year Treasury yield fell back to 1.46 percent on Friday, October 1, from 1.49 percent on Thursday. The rate is thus back to about the same level as it was on Friday, September 24, at 1.45 percent.

Consolidation ahead in EUR/USD?

The USD has strengthened against the euro, partially due to the USD being a currency of safe haven. Note how the currency pair might have found some sort of level just south of 1.16:

EUR/USD graph, February 26th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, one can also see how MA100 and MA200 support the currency pair from below. Is it a time of consolidation ahead?

EUR/USD, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Can copper bounce of MA200?

A strong USD does not work in favour of copper. As shown in the graph below, copper has also been trading down towards MA200. Can copper bounce if the rally in USD comes to a halt?

Copper, February 26th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

In the weekly graph, one can also see how copper bounced of rising MA20. Nevertheless, Fib 23.6 is clearly under pressure:

Copper, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Boliden’s share could need some rising copper prices

The Boliden stock has been sold off quite heavily. EMA9 has started to show signs of improving momentum. So has MACD:

Boliden share price graph, February 26th to October 1st, 2021

Source: Refinitiv Eikon and Carlsquare

The Boliden share price is supported in the weekly graph by Fibonacci 38.2, while MA100 is hoovering a little lower:

Boliden, weekly five-year share price graph   

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Full name for abbreviations used in previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence