2019 Returns May Live or Die on This Relief Rally: a Chart Guide

(Bloomberg) -- Whisper it quietly: Goldilocks may be back.

Stock volatility is tumbling, the S&P 500 Index is enjoying three days of gains for the first time since November and U.S. credit markets are posting the mother of all rebounds -- a spirited cross-asset bounce that belies the December global meltdown.

For dip buyers, the stars are aligning. President Donald Trump appears to be aware of the negative impact of his aggressive trade policies on the equity bull market he took credit for, moderating his stance accordingly. The Federal Reserve is singing a move dovish tune, potentially easing financial conditions as well as upward pressure on the dollar. Stimulus in China is another reason for cheer.

But fears persist, with Brexit, slowing global growth and rising debt levels threatening to punish those rediscovering their appetite for risk.

Here’s a look at key reversals underway and levels to watch in the days ahead.

Dollar’s Downtrend

The greenback’s solid advance in 2018 helped drive the ‘America First’ global story, hitting emerging markets and commodities in its wake. Just a few days in, there are signs of a turn, with the U.S. Dollar Index falling for eight sessions in the past 10. Wall Street is turning more bearish on the currency, even as investors still hold a net long position overall.

The 200-day moving average for the U.S. currency is about 0.6 percent away, while the 100-day metric may now form resistance for any rebound.

China’s yuan is making a quiet comeback. The prospect of a trade breakthrough boosted the currency to its strongest since August in offshore trading.

Stock Levels

In Europe, the 50-day moving average of the Stoxx 600 Index could be a key focus in the coming days. In the last few sessions of 2018, the gauge hit the lowest in more than two years and ended down more than 13 percent, the worst annual performance since the crisis.

Since then it’s climbed about 6 percent, rising three of the past four days, even as economists fret Germany is headed for a technical recession.

The roller-coaster in U.S. equities continues. The S&P 500 is enjoying its best start to a year in at least a decade.

“There is a risk that investors who miss any rally could lose out on the bulk of the returns on offer this year,” Goldman Sachs Group Inc. strategists led by Peter Oppenheimer wrote in a note this week.

And debt is back, with high-yield credit tightening at some of the fastest levels since the crisis as inflows return.

Commodity Rally

In a bullish signal for the industrial cycle, oil is on course for the best start to a year on record. West Texas Intermediate crude has rallied almost 13 percent in the first six trading days -- more than in any comparable period in a data series stretching back to 1983.

On the flipside, the surge in demand for Treasuries -- part of a broad shift into safe havens that took hold in recent weeks -- appears to be easing. The yield on the benchmark 10-year U.S. government bond is climbing fast. Having brushed 2.55 percent less than a week ago, it’s almost 20 basis points higher, with 2.75 percent the next potential milestone.

At a $38 billion auction of three-year debt on Tuesday, the bid-to-cover ratio was the lowest since 2009.

--With assistance from Cormac Mullen, Carolina Wilson, Reade Pickert and Eddie van der Walt.

To contact the reporter on this story: Samuel Potter in London at spotter33@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma, Yakob Peterseil

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