US Stock Market Key Points:
- TheS&P 500, Dow, and Nasdaq 100 fall for a fifth straight day on tightening financial conditions and recession fears
- US Treasury yields and the USD rise to levels not seen in several years
- Fed officials reaffirm the FOMC’s commitment to fight inflation. Fed Chairman Powell speaks tomorrow.
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Years of low interest rates appear to be having unintended consequences as central banks are now on a quest to contain inflation. Following the Fed’s decision to raise rates by 75 bp last week in an effort to achieve price stability, US Treasury yields have soared to levels not seen in many years. The two-year note touched 4.3% today, the highest since 2007; while the ten-year note reached 3.83%, a high seen in 2010.
Higher yields have attracted foreign investment and thus strengthened the dollar index (DXY). Today, the DXY index traded as high as 114, a level last seen in 2002. But the negative consequence of the dollar’s strength is that it puts downward pressure on other assets, such as commodities. Oil and gold have traded sharply lower, as the USD strength makes them more expensive for foreign buyers and raises fears of lower demand. At the time of writing, oil was down 2.35% to 76.89, while gold was down 1.31% to 1633.90.
The new norm of high prices and tighter financial conditions around the world are fueling concerns about a global recession, bolstering volatility and risk aversion. The negative mood has been clearly seen in U.S. equity indices, with stocks subdued and the Dow officially closing in bear market territory.
Today, sentiment failed to improve. Overnight volatility in currency markets, which sent the GBP/USD to its lowest level on record, reinforced the cautious tone, keeping investors on edge and depressing risk appetite. At the close, and despite a positive open, the main stock indices finished lower, with the Dow, S&P500 and Nasdaq 100 dropping 1.10%, 1.2% and 0.51% respectively. The S&P 500 reached a new closing low for 2022.
Ten of the eleven S&P 500 sectors posted losses. The Real Estate Sector closed down 2.61 % as rising interest rates are negatively affecting housing demand. The only sector that outperformed was Consumer Discretionary. Casino operators’ shares posted gains after Macau announced a plan to allow Chinese tour groups to return to casinos in November, for the first time in nearly three years.
From a technical standpoint, there is an important support level in the S&P 500 around 3660. Last week the bears briefly pushed it below that level, but bulls defended it, with the index eventually closing around 3700. Something similar occurred today, but the area is still holding. In any case, a clean break could reinforce selling momentum, sparking the next leg lower in the index.
S&P 500 Mini Futures Weekly Chart
As for the Nasdaq 100, an important support level is limiting losses around 11256. A break below this level could trigger a downward move to 11060.
Nasdaq 100 Mini Futures Weekly Chart
On a positive note, while Fed officials continued today with a hawkish tone and reaffirmed the FOMC’s commitment to fight soaring inflation, the Boston Fed president said that supply disruptions are begging to fade and “there are reasons to be somewhat more optimistic about the ability to achieve the necessary slowing of demand without leading to a significant downturn”. She added that “Household and business balance sheets are considerably stronger than in previous tightening cycles, reducing the risk of a significant retrenchment in spending and investment as interest rates rise.”
Similarly, Fed President Bostic said “We need to have a slowdown. There’s no question about that, but I do think that we’re going to do all that we can at the Federal Reserve to avoid deep, deep pain. And I think there are some scenarios where that’s likely to happen.”
Looking ahead, Fed Chair Powell is scheduled to speak tomorrow at 7:30 EDT followed by Consumer Confidence later in the day.
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—Written by Cecilia Sanchez-Corona, Research Team, DailyFX