Summary

Last week all stock indices which matter on global financial markets faced a strong volatility increase. To illustrate the situation we can call it a rollercoaster. Monday’s plunge was caused by surprisingly strong negative local stock exchanges reaction to the weak China manufacturing PMI. In two days the Shanghai Composite index shed 15%, and in the week ended 28th August the Shanghai Stock Exchange dropped 8%. On Wednesday the People's Bank of China (PBOC) cut interest rates including the required reserve ratio which was lowered by 50 basis points for all banks. It helped to improve market sentiment in the rest of the week. Markets expect further interventions by the PBOC. We received very positive revised data on the U.S. GDP which grew by an annualised rate of 3.7%. Adding the relatively dovish attitude of the FOMC members, it should result in increased willingness to buy shares before the September FOMC meeting. A continuation of the bull market is possible, but we must admit that sessions of strong declines like on last Monday do not come from nothing. It shows that there is a problem (China) and it can burst at any time. Therefore, investors will be still cautious for a longer time.

Western Europe stock exchanges recovered Monday's losses - the DAX was up 1.8%, and the CAC40 gained 1%. Wall Street indices also managed to bounce back, they ended the week about 1% above the closing line. Against such a backdrop, the WSE looked pretty weak. At the beginning of the week decreases hurt not only large companies but also small and medium-sized. Later, the WSE indices were making up for Monday’s losses, but in the end large and medium-sized companies lost nearly 2%, and small went down by 1%. It confirmed the theory of relative weakness of our stock exchange. It is possible that until the parliamentary elections the situation will not change. Only solving the political risk involving an uncertainty of political forces conformation in Poland and finding a specific remedies for mining and banking sectors can result in foreign capital’s return on our stock market.

The data which will be released at the end of this week is worthy of particular attention. On Thursday we will know results of the ECB meeting. Changes in the interest rates are not expected. Nonetheless, Mario Draghi's press conference and his reference to growing uncertainty may be important for the markets. If his words are interpreted as a forecast of further quantitative easing, it should also result in growths on stock markets. However, the data on the U.S. labour market will be the most important this week. In our view, only much higher change in employment in the non-agricultural sector than the consensus can lead to speculation about a rate hike in the U.S. in September. Additionally investors should pay attention to the PMI and ISM readings from Europe and the USA.

Technical Analysis

Graph 1. WIG20 daily. Source: Stooq

During the past week the WIG20 was highly volatile. The end result (1.6% decrease) may not look particularly well. Nevertheless, note that several percent decline and the down gap appeared on Monday, but in the following days the index was laboriously recovering losses. Currently, the closest resistance level is 2,108 points. Defeating that resistance would mean closing the down gap and increase the likelihood of an upward move to 2,200 or 2,300 points. Overcoming of the 2,300 level would be a strong confirmation of the end of the downtrend. But certainly it will not be easy. A big battle between demand and supply at the aforementioned levels is expected.

Graph 2. PKN Orlen daily. Source: Stooq

The PKN Orlen was chosen as the company of the week due to the bearish formation which appeared on the chart. It is about the double top which may forerun a reversal of the upward trend. The range of a drop had been completely realized, but the course did not bounce back even when the WIG20 was growing. Back above the resistance at 80 PLN would be beneficial for the bulls, however, it will be difficult to achieve. Weekly decline of almost 14% aroused concerns about support levels at 70 and 63 PLN.

Authors: MM Prime TFI S.A. Investment Management Team

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