04 February 2011 at 12:26 GMT
The turmoil in Egypt and what we see as the root cause for the unrest - inflation in agricultural products - has dominated the headlines during the past week. The resulting political uncertainty in the Middle-East has certainly created some volatility but US and European markets have kept their course.
Indeed, against this backdrop, US economic figures have surprisingly kept to the upside, as the Citigroup Economic Surprise Index for the United States shows:
Citigroup Economic Surprise Index US – source Bloomberg
In support of equity markets, Ben Bernanke also reaffirmed his “put” by commenting that job growth was still not strong enough to even start thinking about tightening monetary conditions.
On the European front, stock markets were more volatile but still supported by strong PMI readings both for the Manufacturing and the Services sectors. Trichet’s rather dovish comments on Thursday also contributed to support the “lax liquidity” theme.
All in all, stock indices have therefore progressed albeit at a slower pace than we expected. Trading is very often about patience and waiting for the fat pitch: we therefore still expect to reach our targets on both sides of the Atlantic before positioning ourselves on the short side.
In Europe, the Euro Stoxx 50 is still grinding higher towards the 3,050 level where we see a short-term top:
Euro Stoxx 50 – Daily chart - source Bloomberg
Indeed, after playing around the round number of 3,000, we seem to have finally cleared the hurdle. U.S. Nonfarm Payrolls this afternoon will no doubt create some volatility but a disappoiting number may in our view still create an opportunistic entry point in the 2,970 area.
In the US, the S&P 500 index has - as expected – stylishly danced around the round number of 1,300. We believe that the level has now been “cleaned up” and the index is ready for a move higher as a result.
S&P 500 – Daily chart - source Bloomberg
As per our commentary last week (see: Stocks in the week ahead: Get ready for the Correction!), we still expect the index to eventually reach the 1,320 area before a meaningful retracement can take place.
A word of caution though: trying to pick a top in a strong trend is always a tricky business and success in such an endeavour will never be attained without an element of luck. Hence we would warn against over-exposure against the trend although we see the “retracement scenario” as a good risk–reward trade at the said levels.
Have a good trading week!