Global stock markets: Divergent sentiments and hidden risks threaten financial stability

Global stock markets witnessed an improvement in performance on Tuesday, as futures for U.S. stock indices rose following a sharp decline in bond yields a day earlier.

Additionally, the markets are eagerly awaiting the earnings results of some of the largest U.S. technology companies tomorrow, boosting optimism among investors. However, these positive factors come alongside economic and political challenges that increase tensions and risks in the markets.

The futures for the Dow Jones Industrial Average rose by 60 points or 0.2% after the index dropped 190 points on the previous day, closing at 32,936 points. Futures for the S&P 500 index increased by 0.3%, while futures for the Nasdaq Technology Index rose by 0.4%.

In my view, global stocks have faced significant pressure in recent days due to a sharp rise in bond yields, raising concerns that the Federal Reserve may keep interest rates higher for longer than expected. The current rise is attributed to a decrease in bond yields on Tuesday, with the yield on the 10-year U.S. Treasury bonds dropping to 4.83%.

Currently, market and investor attention is shifting toward corporate earnings results, with expectations for the announcement of earnings by some of the largest technology companies like Microsoft and Alphabet later in the day. These companies are key components of major stock indices, making their results of great importance for market movement.

I believe concerns about the trajectory of interest rates in the United States continue to dominate global stock trading ahead of the next Federal Reserve meeting to make policy decisions. I expect that the economic data expected this week will provide signals about the state of the U.S. economy, which could give some indications about the future monetary policy path and potentially lead to sharp fluctuations in the markets.

In Asian markets, most stock markets experienced significant gains in the early hours of the day, with the Shanghai Composite Index rising by 0.8%, and the Nikkei 225 in Tokyo gaining 0.2%. However, the Hang Seng Index in Hong Kong fell by 1.1% after a Monday holiday, which saw market declines.

Nevertheless, the Nikkei Index returned to losses in most of today’s trading following the release of Purchasing Managers’ Index (PMI) data indicating weakness in the Japanese economy. Currently, investors are eagerly awaiting the release of the global composite PMI data.

In conclusion, the improvement in global stock markets highlights their sensitivity to multiple factors such as bond yields, corporate earnings, economic data, and geopolitical events. Simultaneously, various risks are currently affecting markets, making financial stability a challenge that requires careful monitoring and in-depth market analysis before making investment decisions.

Regarding the types of global stocks and their data, the biggest gainers were in the communication services, technology, and consumer discretionary sectors, rising by 0.72%, 0.42%, and 0.21%, respectively. The biggest losers in global stocks were in the energy, materials, and real estate sectors, declining by 1.62%, 1.07%, and 0.84%, respectively.

All eyes are now focused on key economic calendar events, including important data on U.S. new home sales, the preliminary Gross Domestic Product for the third quarter, which is the preferred inflation gauge by the U.S. Federal Reserve, and the core personal consumption expenditure index.

This comes after Federal Reserve officials adopted a more neutral stance on monetary policy over the past week, leading to significant market volatility and a tendency towards a sideways trend in the medium term.

(S&P500) Prices Chart – MT4 Platform from XS.com

The S&P 500 index has been unable to maintain itself above the 200-day simple moving average and still trades above support near its lowest level of around 4,200. A breach and sustained movement below this level may target the 4,070 level, which is the next support area in case of a price decline.

On the other hand, closing back above the 200-day simple moving average could support a weak upward trend, which might subsequently see the price testing the short-term trendline resistance from the early September high at $4,600.

I believe that the series of gains in the S&P 500 index came to an end two weeks ago when the index dropped by 2.4% last week, closing at 4,224 on Friday. Geopolitical conflicts and the rise in the 10-year Treasury bond yields to over 5% were among the main reasons for this overall decline. This was the first time that the Treasury bond yield has exceeded 5% since 2007. This has implications for mortgage and loan interest rates, leading to increased borrowing costs and posing a burden on many global stocks.

Since last Friday, the market has undergone a downward correction, erasing approximately one-third of this year’s gains, and prices are currently testing support at October’s lowest levels. This also reaffirms the retest of the technical breakout that occurred in May, and over the next few months, some upward movements are likely, reaching the previous resistance level near the 50 and 100-day moving averages, 4,383 approximately. Breaking above these resistance levels may indicate an upward move by the end of the year.

This is possible as the market approaches the short-term selling peak, suggesting a sideways trend for now. There is no doubt that there is a risk of the market failing to hold onto support levels, potentially leading to further declines before the mentioned upward movement. As always, we should manage our risks accordingly, and I believe that selling on rallies and buying on dips is the best approach for the current situation until global stock markets stabilize.