Week Ahead: US500 set for major pullback?

• US500 gains 15% in first half of 2024

• April only negative trading month this year

• US CPI, Powell Testimony & Big bank earnings in focus

• Bullish but RSI overbought on multiple timeframes

• Technical levels – 5600, 5500 & 5460
  

The UK general election is done and dusted with Labour securing a landslide victory as widely expected.

But the political risks don’t end there…

Just across the English Channel, France will hold the second and final round of its legislative elections this Sunday. And if the far-right National Rally wins an absolute majority, that shocker could see the FRA40 plunging to its year-to-date low.

Speaking of indices, FXTM’s US500 continues to dazzle markets with record highs!

And could see more volatility this afternoon thanks to the US jobs report (Friday 5th July). But even as anticipation mounts, investors are bracing for more action in the week ahead:

Sunday, 7th July

• FRA40: Second round of French legislative elections

Monday, 8th July

• JP225: Japan current account

Tuesday, 9th July

• AU200: Australia consumer confidence
• CNH: China aggregate financing, money supply, new yuan loans
• TWN: Taiwan trade
• US500: Fed Chair Jerome Powell testimony

Wednesday, 10th July

• CN50: China PPI, CPI
• JP225: Japan PPI
• NZD: RBNZ rate decision
• US500: Fed Chair Jerome Powell testimony, Fed speech

Thursday,11th July

• GER40: Germany CPI
• JP225: Japan core machine orders
• NZD: New Zealand food prices
• ZAR: South Africa manufacturing production
• UK100: UK industrial production
• US500: US June CPI report, Fed speech

Friday, 12th July

• SG20: Singapore GDP
• CN50: China trade
• JP225: Japan industrial production
• USDInd: US University of Michigan consumer sentiment, PPI
• US500: JPMorgan, Citigroup, Wells Fargo earnings

All eyes will be on the incoming US inflation data, Powell’s testimony and earnings announcements by big US banks which could move the US500.

With the Relative Strength Index (RSI) signalling that prices are heavily overbought, could a technical pullback be on the horizon?

Note: A pullback is a temporary pause or decline in an asset’s overall bullish trend.

These 3 factors may influence the US500 outlook in the week ahead:

  1) US June CPI report

The incoming US Consumer Price Index (CPI) is likely to impact bets around when the Fed will start cutting interest rates in H2.

Markets are forecasting: 

• CPI year-on-year (June 2024 vs. June 2023) to cool 3.1% from 3.3% in the prior month.
• Core CPI year-on-year to remain unchanged at 3.4%.
• CPI month-on-month (June 2024 vs May 2024) to rise 0.1% from 0% in the prior month.
• Core CPI month-on-month to remain unchanged at 0.2%.

Expectations around lower US interest rates have been one of the driving forces behind the US500 rally in 2024. This is because the index has a handful of tech stocks that remain sensitive to US rates. Digging deeper, tech accounts for 33% of the US500 value!

• The US500 could dip if the inflation numbers print above market forecasts.

• Should the CPI report show more evidence of disinflation, the US500 may receive a boost.

Note: Before the key US inflation data on Thursday, the US500 may be influenced by Fed Chair Jerome Powell’s congressional testimony earlier in the week. Should he strike a dovish tone, US equity bulls are likely to receive a boost, and vice versa.

  2) Big bank earnings

It’s that time of the year again…

Second quarter earnings season kicks off on Friday 12th July, led by the biggest US banks.

Heavyweights such as JPMorgan, Wells Fargo and Citigroup and will be under the spotlight. Investors will closely comb over their earnings for fresh insight into the health of US banks which can be used to gauge the health of the US economy.

When factoring in how financial stocks make up over 12% of the US500, the incoming bank earnings could spark some volatility.

• US500 may push higher if bank earnings beat estimates.

• Should earnings disappoint, US500 bears could return to the scene.

  3) Technical forces

The US500 is firmly bullish on the weekly and daily timeframe. However, the Relative Strength Index (RSI) is above 70 – indicating that prices are heavily overbought.

Note: US500 tracks the underlying S&P 500 index

After recently hitting record highs, the index is trading around unchartered territories.

• Should 5500 prove to be reliable support, bulls could challenge 5600.

• A decline below 5500 may open a path toward 5460 and 5400.