Various markets are approaching key technical levels. If the support holds, another sustainable rally is in store.
S&P 500: Although it closed lower, it touched the 200D MA and bounced up.
Credit (JNK): Finding support at the 200D MA level.
US Dollar Index: Some way to go before encountering resistance at the 200D MA.
The following charts show why we are at a meaningful bottom for equities and bonds to rally.
China is dealing with several problems. One, the economy is slowing due to increased regulations on the tech and property sector. Two, the government has been trying to wean off the economy from too much leverage. Three, Omicron is a tough challenge for China, given the low vaccination rate, fragile healthcare system and the political capital put into the lockdown approach.
Omicron will run its course, which means more people will get infected. With increasing lockdowns, economic activity will slow even more in the coming months. There will be economic pain, but deaths will remain on the low side.
This is probably a better choice for the authorities, given that “living with COVID” will likely lead to a surge in cases, failure of the healthcare system to cope and the resultant high levels of death. India, a country will a large but younger population, saw 4,000 deaths at its peak. Although Omicron is less lethal, China’s population is older and vaccination rates among seniors are low. High death rates and a collapse in the healthcare system is untenable for the authorities, especially going into the Party Congress which will elect the next leaders.
If more economic pain is in store for China, how much of it is priced in by markets? Are Chinese bonds stabilising? Are Chinese equities still free-falling? How much more can Chinese assets fall? Eventually, the authorities will have to live with the virus by increasing vaccination rates and increase healthcare capacity.
When will we get there?
US stocks are up strongly despite 1) IMF downgrading economic growth outlook, 2) lacklustre earnings season, and 3) FED officials leaning towards controlling inflation.
S&P 500 was up 1.61%, NASDAQ Comp up 2.15%, Small Caps up 1.90%, Tech up 1.88% and Financials up 1.37%.
Bonds continue to trade lower, with the 10Y yield rising to 2.93%, the 2Y to 2.61%. High Yield Bonds down -0.07% while EM bonds lower by 0.4%.
In My Opinion, markets are already quite oversold, who else is left to sell, buyers are already starting to creep in if recession risk is not rising.
