Global macro overview for 30/10/2018

Wall Street ended last week very weak, today the Shanghai stock market has added another 2.0% and the correction in Europe is treated as a temporary moment of relief. The bag of problems is full and new risk factors are added instead. Yesterday in the morning, with the help of tabloid headlines, the market speculates about the end of Angela Merkel's power in Germany after the terrible local elections in Hesse, where support for the CDU and SPD coalition parties fell 10 percentage points. For the moment, its leadership in the party is at risk (the press reports that it will not seek re-election), and given that Merkel's term of office is to continue for several years, Germany without Merkel is not a close scenario. Nevertheless, Merkel for the euro area has been synonymous with stability and care for unity, so the discussion about her departure is adding fuel to the fire when the problems of the Italian budget burden the valuation of European assets. The spread between the yields of the 10-year-olds of Italy and Germany is elevated, although falling below 270 bp after Friday's S&P agency retained Italy's rating for BBB, but downgraded the negative from stable. The chances of the rating downgrade were not large, although speculation was not lacking. The relief may be short-lived, however, if we take into account that there is no visible finale of the dispute between the Italian government and the European Commission. A week ago, we saw how Moody's less dramatic decision about rating downgrade was only one degree.

Let's now take a look at the SP500 technical picture at the H4 time frame. Markets remain uncorrelated with diving indices and relative stability of the currency market. In the coming days, it will probably not be better, as the end of the month is usually affected by the influence of shifts in investment portfolios. Strong changes in stock market indices enforce adjustment of hedging positions against exchange rate risk. The SPX has bounced from the level of 259.84 and currently is heading towards the technical resistance at the level of 267.69. This might be quite strong resistance zone, so any breakout higher is unlikely. The market conditions are now oversold, so any bounce should be short-lived.

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