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The geopolitical situation has changed significantly this week, and although the return of full peace in the Middle East is still far away, global stock markets are trying to stabilize and stay above the bottom levels seen in late March.
Does the bottom recorded by global indices on February 28, one month after the military operation began, represent the final bottom of the sell-off process? This question requires a thoughtful answer, both fundamentally and technically.
In this new article, I focus on technical analysis, i.e. determining the technical levels that a strategic financial asset must reach in order for us to truly believe that a market bottom has been reached.
I selected the following strategic assets: oil, natural gas, urea fertilizers, two-year U.S. Treasury yields (which best reflect the Fed’s monetary policy expectations), S&P 500, Dow Jones and Nasdaq 100, U.S. technology sector index, and finally the U.S. dollar (DXY).
The basic idea is that these assets must return to certain lower levels in order for us to begin to believe that the wave of selling related to events in the Middle East is over once and for all.
Specifically, energy markets are the first leading indicator. A sustained decline in oil prices (WTI below $94, preferably closer to $80) would mark a significant decline in the geopolitical risk premium. The same analysis applies to Brent crude and European natural gas, as their return below critical levels will reflect a gradual return to stabilization in flows and expectations.
Secondly, strategic fertilizers such as urea play an advanced role in the global economic chain. Price stability would signal production cost pressures are beginning to ease, a prerequisite for quelling global inflation.
In the bond market, 2-year Treasury yields should stop rising relative to the Fed’s current interest rates, as this means the market is anticipating a rate hike, which is inconsistent with a bottom in the stock market.
In terms of stock indexes, the basic technical signal is still a rebound from the 200-day moving average. Sustained gains above these levels for the S&P 500, Nasdaq and Dow would reflect returns from long-term investment flows and improving market structure.
Finally, the U.S. dollar should lose some relative strength. A fall below the resistance zone on the U.S. Dollar Index (DXY) would indicate improving global financial conditions, which would be positive for risk assets.
Only the convergence of all these signals can confirm with a high degree of confidence that the market has indeed bottomed.
The chart below summarizes the minimum and optimal technical levels that must be reached to feel confident that the sell-off in geopolitical markets is over once and for all.
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