InvestMacro

By JustForex

The US and European stock markets rebounded slightly on Wednesday after the Bank of England said it would intervene in the bond market to curb the devastating rise in borrowing costs. Investors were alarmed last week, particularly by a sharp rise in bond yields. Central Banks sought to raise interest rates to rein in red-hot inflation before it sent the global economy into recession. As the stock market closed yesterday, the Dow Jones Index (US30) added 1.88%, and the S&P 500 Index (US500) increased by 1.97%. Technology index NASDAQ (US100) gained 2.39% on the day.

FOMC spokesman Bostick said yesterday that the baseline interest rate hike was 75 basis points at the November meeting and 50 basis points in December.

According to the US National Association of Realtors, pending home sales declined for the third straight month in August. Compared to a year ago, pending transactions were down 24.2%. The Index is now down to 88.4. The 100 Index is in line with contract activity in 2001.

Equity markets in Europe were also mostly up yesterday. German DAX (DE30) gained 0.36%, French CAC 40 (FR40) added 0.19%, Spanish IBEX 35 (ES35) declined by 0.05%, British FTSE 100 (UK100) closed yesterday at plus 0.30%.

The Bank of England announced Wednesday that it would buy as many UK government bonds as necessary to stabilize debt markets and delay the start date of its bond sales. The central bank explained that if yields rise higher, it could lead to an unjustified tightening of funding conditions and reduce the flow of credit to the real economy. The Bank of England said in a statement that “the Bank of England’s Financial Policy Committee recognized the market risks, recommended an intervention, and proposed a plan to buy bonds urgently.” At the same time, the Bank of England will postpone the start of its quantitative tightening program (QT).

The UK housing market could face a perfect storm as mortgage rates rise and house prices fall. Rising borrowing costs and a likely slowdown in economic growth threaten to trigger a sell-off in the British housing market, with consequences for personal wealth and the economy as a whole. Mortgage deals for new customers now have rates around 5%-6%, a sharp increase from the norm of around 2%.

The International Monetary Fund (IMF) and rating agency Moody’s criticized Britain’s new economic strategy announced Friday, which caused British asset prices to collapse.

Oil prices rose on Wednesday as production cuts caused by Hurricane Yang outweighed downward pressure from a strengthening dollar. About 190,000 barrels a day of oil production in the Gulf of Mexico, or 11% of total production, was halted because of Hurricane Yang, according to US government data.

The US will oppose parts of Ukraine from becoming part of Russia, including through the United Nations, and will impose additional economic sanctions.

Asia’s major stock indices fell sharply on Wednesday. Japan’s Nikkei 225 (JP225) decreased by 1.50%, Hong Kong’s Hang Seng (HK50) ended the day down by 3.41%, and Australia’s S&P/ASX 200 (AU200) lost 0.53% yesterday.

The New Zealand dollar fell to its lowest level against the US dollar in more than two years. The currency has fallen nearly 3% over the past week as financial markets reacted to sharp rate hikes imposed by central banks to fight inflation.

The ANZ Business Confidence Index showed that inflation in New Zealand and higher interest rates negatively affect business sentiment. The RBNZ currently holds one of the highest interest rates among major economies and ranks second behind the Bank of Canada and the US Federal Reserve at 3.25%. Analysts expect another 25 basis point increase from the RBNZ, but it is also possible that New Zealand’s Central Bank is nearing the end of its hiking cycle.

S&P 500 (F) (US500) 3,719.04 +71.75 (+1.97%)

Dow Jones (US30) 29,683.74 +548.75 (+1.88%)

DAX (DE40) 12,183.28 +43.60 (+0.36%)

FTSE 100 (UK100) 7,005.39 +20.80 (+0.30%)

USD Index 112.72 -1.39 (-1.22%)

• – New Zealand ANZ Business Confidence (m/m) at 03:00 (GMT+3);
• – Eurozone Spanish CPI (q/q) at 10:00 (GMT+3);
• – Eurozone German CPI (q/q) at 15:00 (GMT+3);
• – US GDP (q/q) at 15:30 (GMT+3);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
• – Canada GDP (m/m) at 15:30 (GMT+3);
• – New Zealand RBNZ Gov Orr Speaks at 16:00 (GMT+3);
• – US FOMC Member Bullard Speaks at 16:30 (GMT+3);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+3);
• – US FOMC Member Mester Speaks at 20:00 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By ForexTime

Last month, we posed the question: “Is the worst over for US stocks?”

Answer: apparently not.

A week after that August 10th article, the S&P 500 did climb higher, only to be resisted by its 200-day simple moving average.

 

The blue-chip stock index even closed above the 50% Fibonacci retracement level, which was the key criteria for suggesting that the worst is over for the 2022 rout in US stocks.

As cited in the August article, according to data by the CFRA and S&P Global, in 18 of the 19 ‘bear markets’ seen since World War II, the S&P 500 then went on to a fresh bull run after closing above its 50% Fib retracement line.

But as the saying goes across financial markets: “Past performance is no guarantee of future results.”

And that track record (stated above) now needs to be updated to “18 out of the past 20 bear markets …”.

Since that August article, the S&P 500 has unwound all of its summer gains, even printing intraday prices not seen since end-November 2020.

In essence, we have seen “worse” levels this week for the S&P 500 compared to those June lows.

Why did the S&P 500 erase its summer gains?

Recall the premise for the S&P 500’s summer rally, as stated in last month’s article:

“Arguably, the primary reason is that markets believe that the Fed has done the largest chunks of its rate hikes already.”

Additionally, the S&P 500’s summer gains was based on the idea of a “dovish pivot” by the Fed.

That’s to say that markets had expected the Fed to be less courageous about sending US interest rates higher, for fear of triggering an economic recession.

But now we know better.

Since then, we have seen the US inflation data stubbornly printing near its highest levels in around 40 years.

Hence, many Fed officials, including Fed Chair Jerome Powell himself, have since sent a strong message to the markets:

The US central bank is hell bent on taming multi-decade high inflation by sending US interest rates even higher, and is willing to tolerate economic pain along the way.

Markets duly paid heed and raised their forecasted peak for this ongoing Fed rate hike cycle by about 90 basis points!

• Back in August, markets expected that US rates won’t go higher than 3.6% in March 2023.
• Today, that forecasted peak is now expected to reach nearly 4.5% by March.

What do higher US interest rates mean for the US economy?

Essentially, the Fed wants to see some “demand destruction”.

Policymakers want to see less money in an economy chasing after scarce goods and services.

That should, in theory, discourage businesses from ramping up their selling prices, hopefully resulting in slower inflation.

However, more economic pain could also bring about a shrinking economy i.e. a recession.

What do higher US interest rates mean for US stocks?

More downside likely.

With the US unemployment rate forecasted by the Fed to rise to 4.4% by end-2023, significantly higher from the 3.7% figure from last month, more jobless Americans should translate into less demand/spending in the US economy, which should also mean less earnings for companies.

Lower earnings due to such “economic pain” should also lead to lower share prices, with such a narrative already dragging on the S&P 500.

Tech not spared

Also, higher interest rates mean its tougher for so-called “growth companies” to continue borrowing cheap loans to fund its expansion plans while forsaking profitability.

Hence, as higher interest rates chock some of the potential growth (and earnings potential) for these growth companies, that has led to lower stock valuations as well.

Keep in mind that, with many of these growth stocks concentrated in the tech sector, no surprise then that the tech-heavy Nasdaq 100 has a year-to-date decline of almost 30%, falling deeper than the S&P 500’s 22% year-to-date decline.

However, the Nasdaq 100 is still managing to not surpass its June lows … for now.

Also, note that tech-led declines would only exert more downward pressure on the S&P 500.

This is because IT stocks (think Apple, Microsoft, Nvidia, etc.) account for over a quarter (26.6%) of the S&P 500.

So, if you couple the S&P 500’s exposure to tech stocks with the weightage of consumer discretionary stocks (e.g. Amazon, Tesla, McDonald’s, etc. – which tend to take an earnings hit when customers have less disposable income during times of economic pain), then a US recession that’s triggered by higher US rates would only exert more downward pressure on the S&P 500.

NOTE: The S&P 500 index is widely used as the benchmark to gauge how overall US stocks are performing.

So where to next for the S&P 500?

Brace for the low-3000s.

In market fears surrounding a US recession continue ramping up, that may send the S&P 500 to as low as:

• 3400: around the pre-pandemic peak set in Feb 2020
• 3200: double-bottom from Sept/Oct 2020

Though for more immediate consideration, the S&P 500 is testing a crucial support level – its 200-week simple moving average.

This technical indicator has supported the S&P 500 in recent years, with such an episode last occurring at end-2018.

Athough the Fed was also busy raising interest rates back in 2018, those benchmark rates today have already surpassed those levels and are now standing at its highest since 2008 at 3.25%.

And US inflation is still around its highest levels since the early 1980s.

So if this 200-week SMA doesn’t hold, the S&P 500 is likely to then set course for the low-3000 region, dragged down by heightened  fears over a potential US recession and higher-for-longer US interest rates.

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

How investors get snookered into the belief of “a further market advance”

By Elliott Wave International

Nothing raises the hopes of the bullishly inclined like a rapid bear market rally. And there’s been several since the early January top in the Dow Industrials and S&P 500 index.

You may be interested in a key characteristic of most of these rallies.

The Sept. 12 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term analysis of major U.S. financial markets, explains with this chart and commentary:

Sometimes the upward push will end at or near top tick of the daily range. A quick glance at the countertrend rallies since the January peak in the S&P shows at least five instances of this happening, indicated by the red arrows on the chart. The final trade of these daily ranges was at or very near the high of the day, creating belief in a further market advance when in fact it was the top of the rally.

Keep in mind that “not every strong up day that closes at top tick marks the end of the rally but the end of the rally is often attended by strong up days that close at top tick.”

That said, here are just a couple of examples in recent months of the lingering optimism:

• Why There’s a Chance the Stock Market Has Hit Bottom (Barron’s, July 19)
• Top Investment Ideas for a Market That Might Have Hit Bottom (Bloomberg, Aug. 4)

In other words, memories of the prior bull market die hard, even several months after the S&P 500’s record high near the start of the year.

And, regarding those July and August headlines about a market bottom, that didn’t turn out to be the case. Here’s a Sept. 16 headline (CNBC):

FedEx plunge could spell bad days ahead for market as bellwether Dow Transports index hits new low

The question is: Will other indexes — like the S&P 500 and Dow Industrials — also plunge to new lows?

Now is the time to familiarize yourself with the U.S. stock market’s Elliott wave pattern.

If you’re new to Elliott wave analysis or need a refresher, do know that the definitive text on the topic is Frost & Prechter’s book, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from this Wall Street classic:

Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott’s highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the “preferred count,” is the one that satisfies the largest number of guidelines.

If you’d like to read the entire online version of Elliott Wave Principle: Key to Market Behavior, you may do so for free after you join Club EWI, the world’s largest Elliott wave educational community (about 500,000 worldwide members and growing rapidly).

A Club EWI membership is free and allows you free access to a wealth of Elliott wave resources on financial markets, investing and trading without any obligation. Those resources include exclusive videos and articles from Elliott Wave International’s analysts.

Just follow the link, and you’ll be on your way to becoming a Club EWI member: Elliott Wave Principle: Key to Market Behavior — get instant and free access now.