S&P 500, Nasdaq 100, Dow moderate on soaring yields, Fed roadmap raises concerns
U.S. EQUITY OUTLOOK:
- The S&P 500the Nasdaq 100 and the Dow Jones trade lower at the start of the week
- Fed officials signal that the tightening cycle may need to be aggressive to restore price stability, triggering a sharp rise in Treasury yields and weighing on sentiment
- In this article, we explore key technical levels for the S&P 500 and Nasdaq 100
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AAfter putting in their best 5-day performance since November 2020 last week, US stocks were controlled on Mondayoscillating between gains and losses, in a volatile session amid monetary policy jitters. At market close, the S&P 500 edged down 0.04% to 4,461, returning to its best levels in more than a month hit shortly after the opening bell. The Dow also fell, slipping 0.58% to 34,552 and ending an eight-day winning streak. Meanwhile, the Nasdaq 100 fell 0.31% to 14,376, dragged down by a substantial rise in bond yields.
During regular trading hoursthe US Treasury curve has shifted up through maturities, with 2-year and 10-year yieldssoaring to 2.13% and 2.32%, respectively, their highest levels since May 2019. The European session saw yields rise on the back of a strong rally in oil prices, but this recovery was then reinforced by central bank comment.
In a speech to the National Association of Business Economics Atlanta Fed President Raphael Bostic said he was ready to raise borrowing costs above the neutral level and favors an acceleration of the reduction of the balance sheet. FOMC Chairman Powell added fuel to the fire and acknowledged that policymakers could raise the federal funds rate by more than The standard 25 bp hike in the future if necessary to restore price stability.Immediately after these words, Wall Street started to assess 40 basis points of tightening for the month of May FOMC Meet.
While the roadmap for the normalization cycle could change depending on the evolution of inflation in the coming months, an overly tight monetary policy is likely to slow GDP growth and, in the worst case, to push the economy into recession. Bond traders seem to be positioning themselves slowly for this outcome, with the 2s10 curve recording its narrowest spread since March 2020 and only 19 basis points away from reversal, an event that tends to portend a economic downturn.
At this point, there is no reason to panic or head for the exits just yet, but traders should be aware that during periods of contraction, the S&P 500 falls on average ~30% peak to trough, with EPS down around 15% for the group.
The larger picture could get even murkier if geopolitical risks are not dissipating any time soon. In this regard, the longer the Russian-Ukrainian war drags on, the greater the negative impact on global recovery and inflation, all the more so if commodity trade flows are further disrupted and/or other nations are drawn into the ongoing military conflict. Although ceasefire and peace talks are ongoing between Kyiv and Moscow, there are no solid evidence that negotiations are progressing favorably at this time, a sign that the crisis could extend into April.
S&P 500 TECHNICAL ANALYSIS
After last week’s strong rally, the S&P 500 failed to follow higher on Monday, with price rejected lower than the 4,470 zone, key resistance created by the 200-day simple moving average and the 2022 50% Fibonacci retracement. correction. That said, If the sellers regain decisive control of the market in the next sessionsthe first support to consider is at 4,385, but if this barrier is violated, a retest from 4.300 becomes more likely. On the other hand, if the S&P 500 resumes its recoverythere and manages to clear the 4,470 hurdle, buying interest may pick up, paving the way for a move towards 4,551, the 61.8% Fib level.
S&P 500 Chart (SPX) by TradingView
NASDAQ 100 TECHNICAL ANALYSIS
The Nasdaq 100’s positive momentum faded after the index failed to clear technical resistance in the 14.390/14,458 areas. If the downside pressure builds, the tech index could drift towards the support at 14,080, although a drop below this floor could accelerate the decline and expose the 13,740 region. On the other hand, if sentiment improves and buyers return, we would need to see a to climb up at the top of 14.390/14,458 to show more confidence in the rebound. If this scenario plays out, the Nasdaq 100 could be poised to challenge 14,901, the 50% Fibonacci retracement of the sale from November 2021 to March 2020-disabled.
Nasdaq 100 (NDX) Chart Prepared in TradingView
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—Written by Diego Colman, Contributor