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The Swing Overview - Week 43

The stock indices had a bullish week and the SP 500 has reached a new all-time high. The VIX fear index is at 15, the lowest since February 2020. US labor market data was also positive and confirms the improving trend. The markets were also reassured by the fact that Evergrande, a large Chinese developer facing bankruptcy, made an interest payment on its bonds. The risk-on sentiment is therefore back. 
 

Evergrande paid coupon payments

On Thursday, Evergrande transferred $83.5 million to a trustee account at Citibank allowing it to pay all bondholders before the end of the grace period for payments, which ends on October 23.

The news brings temporary relief to investors who have been worried about the broader impact of Evergrande's bankruptcy on global markets. However, it is only the first step that gives the company some time to restructure all of its debt. 

News of the payment was provided by a person familiar with the situation but who was not authorized to speak to the media. The company's shares reacted to the news by gaining as much as 7.8%, a day after trading resumed after a more than two-week halt of trading.

Evergrande defaulted on coupon payments totaling nearly $280 million on its dollar-denominated bonds on Sept. 23, Sept. 29, and Oct. 11 with beginning a 30-day grace period for each. The next deadline for Evergrande's bond payments is Oct. 29, when the 30-day coupon grace period from Sept. 29 expires.

Evergrande's troubles have been accumulating for several months. The company has more than $300 billion in debt, and declining cash flow, not sufficient to pay its obligations, has erased 80% of its market value.
 

Data from the US economy

Initial jobless claims fell by 3,000 to 290,000 in the week ending October 16, below economists' expectations of 300,000. This data is indicative of high demand for labor and it is the third decline in a row.

However, the labor market continues to face challenges related to labor and raw material shortages, which are fueling inflation.
 

The inflation increased as expected

CPI data reported for the month of September in the eurozone showed inflation is rising by 3.4% on a year-on-year basis, in line with analysts' expectations. In August, inflation was 3.0%.

Inflation also picked up in Canada, where the core inflation rose by 3.7% year-on-year basis. In August, the core inflation was 3.5%.
 

The US Treasury yields continue to rise

The yield on the US 10-year bond has reached 1.7% and continues to rise. Demand for US bonds is having a positive effect on the US dollar. Risk-on sentiment, on the other hand, is negative for the US dollar, which is why the dollar weakened last week.
 

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Figure 1: The US 10-year bond yields and USD index on the daily chart
 

The US stocks have strengthened

The SP 500 index reached a record closing high on Thursday and its seventh straight rise. The NASDAQ also strengthened thanks to the rise of titles such as Tesla and Microsoft Corp.
 
Of the 11 major sectors of the SP 500, consumer and technology stocks gained the most. On the other hand, energy stocks were negative as oil weakened, suggesting some concerns about global growth.
 
The VIX also referred to as a gauge of fear on Wall Street, closed at its lowest level since February 2020, hovering around 15. The low level of the VIX suggests that investors do not expect a large decline or rise in stocks, despite widespread concerns about supply chain issues driving up costs.
 
On the SP 500 index, price is near resistance levels, having briefly broken above an all-time high. The uptrend is reaffirmed by this and the price is above the SMA 100 average (blue line on the daily chart), which tends to be very strong support. This shows that the previous declines were only a temporary correction.


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Figure 2: The SP 500 index on the daily and 4H chart
 

Podle denního grafu je nejbližší support v oblasti kolem 4 480. Rezistence je pak kolem all-time-high 4 550.
 

German DAX index

The DAX also strengthened in the past week. It correlates with the SP 500. If the SP 500 continues to rise, the DAX could also strengthen. On the DAX, the negative signal for growth is that the EMA 50 moving average is below the SMA 100 on the daily chart and the price has stalled at the SMA 100, which is strong resistance. However, on the 4H chart, the situation is different, the EMA 50 is above the SMA 100, which suggests that growth could occur.

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Figure 3: The DAX on H4 and the daily chart
 

Significant resistance according to the 4 H chart is around 15,600. According to the daily chart, the significant resistance is around 15,800. The closest support is at 15,400.
 

Why is the Japanese yen weakening?

The Japanese yen has fallen to its lowest level against the US dollar in three years and analysts are predicting further weakness. According to some analysts, the USDJPY could reach 115, the level the pair was last at in March 2017.

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Figure 4: The USDJPY on the daily and 4H chart
 

The reason for the weakening of the yen is the policy of the Bank of Japan, which emphasizes maintaining a moderate monetary policy. A weaker yen supports exports, consumption and supports Japanese equities to grow. While other central banks are talking about ending the supportive monetary policy, nothing of the sort is being heard from the Bank of Japan.

This puts the situation into a similar mode before the pandemic when interest rates of the world central banks were higher than Japanese ones. This created an interest rate differential that held the yen at lower levels. The expectation of a rising interest rate differential between the dollar and the Japanese yen is then a reason for the rise of the USDJPY. 
 

The euro strengthened against the dollar

According to the H4 chart, the euro is currently moving in a rising channel. A bullish constellation has formed on the H4 chart, with the EMA 50 moving above the SMA 100. The current risk-on sentiment is also positive news for the pair.

 
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Figure 5: The EURUSD on H4 and daily chart
 

The nearest strong resistance is at the price of around 1.1670. Here, the price has already reacted twice and it is a strong resistance according to the daily chart. Support can be considered as 1.1620 and then 1.1570. Very strong support is 1.1525.

 

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