Is reflation dead and buried?
Following yesterday’s French presidential election, Europe’s markets look somewhat deflated – with major indices such as the French CAC 40 and the Spanish Ibex giving back between half and three quarters of a percent this morning.
A Macron victory was the result the markets wanted and expected, but now that’s arrived it looks like something that’s already been priced in.
The Macron win has potentially negative implications for the UK over Brexit, but both the export-led FTSE 100 and the more domestically-focused Mid 250 indices are doing better as I write, seemingly having taken the news in their stride.
Significant movement in the markets today has come from the FTSE 350 Mining sector, which has reacted to news of tightening financial conditions in China by selling off by another -1.75%, to stand just above 14000.
Tighter financial conditions in China are interpreted as being negative to its overall growth, and China is one of the miner’s biggest customers.
This is all a far cry from the Mining sector index peak of 17294.70, seen in February, when the reflation and global growth story was all the rage.
However that reflation story has so far failed to materialise, as the US CRB Index (a basket of the prices of a range of widely traded and consumed commodities) chart below shows:
Far from rallying in 2017, the US CRB Index has actually sold off – testing back towards key support around 180.
Of course, the CRB index is not the only commodity-related measure of the prospects for economic growth. Both Copper and Crude Oil can play a similar role.
We will look more closely at Oil in the run up to OPEC’s mid-year meeting, scheduled for 25th of May,so today I want to turn our attention to Copper…
And we find that this has also sold off from the peak seen back in early February.
The price of Comex Copper Futures is now flirting with its own 200 day EMA line (found at US$ 250.00).
On the two previous occasions it’s tested below $250.00 (Nov and Dec 2016), it has subsequently rebounded back above in short order…
Perhaps buoyed by the sharp upward momentum seen in the price in the run up to and immediately after the US elections, as the chart below demonstrates:
My trading model tells us that Comex Copper, the CRB Index and the FTSE 350 Mining sector are all in a bear trend.
They have trend strength scores of -11, -14 and -17 respectively, and are therefore in what we could describe as confident bear trends.
The CRB Index has been in a bear trend since mid-October 2014 and, tellingly, the current price point at which it would move back to being in a bull trend is 200.
A level, as you can see from the CRB Index chart I showed you earlier, it has steadfastly avoided over the last 18 months or so.
Now, consider the fact that markets are forward-looking and that they try to price some six months ahead…
Given that we are now well into May 2017, we are effectively looking at prices that reflect expectations for the year end.
This suggests to me that the reflation story is being discounted completely in 2017.
A new stock for our watch list…
As we are all well aware, the markets have, for the most part, been trading in narrow side ranges lately (aside from spikes caused by UK and French election news).
Against this background, trading ideas have been thin on the ground…
The average percentage move for a stock in the FTSE 250 index so far today is just +0.22%, whilst in the FTSE 100 it is a lowly +0.09%.
Not exactly the conditions for a rich vein of stock picking.
However there are a couple of stocks that have caught my eye… including one in the support service sector.
I’ll be sharing the details of that particular stock and just why it’s caught my eye with my Trading Point Pro members.
So that when it hits the price level my trading model has identified, they can take action.
If you want to know what stock is on my watch list so that you too can take action on it…