Views Article – Sharenet Wealth

Markets Struggling for Direction – What Will Be the Next Catalyst?

As the impact of the current pandemic starts to reflect in the economic data, the optimism for a V-shaped recovery is getting less and less. The one thing that has remained constant throughout is uncertainty, and it shows no signs of going away.

Last week the US released another set of worse-than-expected initial jobless claims. This figure especially is becoming quite scary as this was the 8th week into their lockdown, and still the number of new people filing for unemployment was 2.981 million. All-in-all, over 36 million people have filed for unemployment (for the first time) since mid-March. US retail sales for April provided more cause for concern as it dropped to a record low, down 16.4%. The data from Europe were just as bad with their first quarter GDP figures dropping the most since 1995 when the data started to be recorded.

Apart from the bleak economic data, there are currently other risks in the global economy worth noting. The US and China have continued their spat with Trump looking to pass the blame for what has happened to the US economy. He first took aim at China for causing the virus, and then for failing to contain the spread. He is under pressure to take a tougher stance towards China, which he has done, but naturally this is causing friction. China recently tried to start talks to renegotiate terms of the Phase 1 trade deal and possibly invalidating it, but Trump wasn’t interested at all. The risk here is that the whole trade deal is derailed, and discussions for Phase 2 never even start.

Below is a chart of the S&P500. This is pretty much the picture for most markets at the moment, including the SA Top 40. As mentioned last week and can be seen below, the 61.8% Fibonacci level could provide some resistance, which it did. Markets are moving sideways at the moment, struggling to find direction with more and more experts warning that current equity levels are too high. Earlier last week, the S&P looked to have come under some selling pressure but has rebounded quite nicely towards the end of the week. Markets have continued this sentiment this morning.

All the uncertainty globally is putting the recovery in jeopardy. All things being considered, the recovery has exceeded expectations so far. US Fed Chair Jerome Powell last week gave a very honest analysis of the US economy and that the recovery will take longer than anticipated until a vaccine is found. In another interview last night, he warned that the economic downturn could last until late 2021 but expressed optimism that the US would recover.

I can only assume that the US Fed has already used most of their big guns to fight this pandemic – the question is how many tools do they still have left?

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Stephan Maritz

Stephan developed his passion for the markets while working in the Stockbroking division of Standard Bank and is especially passionate about trading (Equities and CFDs). Stephan studied at the University of Stellenbosch and completed a BComm Honours (Business Management) with a focus in Portfolio Management and Bonds. He has also passed the JSE Equity Trader's Exam, RE5 and RE1 Exams as well as the Registered Persons Exams (RPEs) in order to give advice on equities and is a full-time trader and portfolio analyst.