Last week three central banks, the Federal Reserve, the RBA, and the Bank of England, raised interest rates as the battle to tame inflation intensified.
While the key U.S stock index the S&P500 finished the week down a seemingly sedate -0.2%, under the hood it was a very different story. The S&P500 traded in an extraordinarily wide 5.7% range and closed for a second consecutive session below 4200.
The question from here is will the expected path of aggressive central bank tightening into slowing growth emanating from the War in Ukraine and China’s Covid 19 lockdowns send the economy into recession and the S&P500 to new year to date lows. Or is a short-covering rally in the offering?
Last week, Fed Chair Powell indicated that there are two more 50 bp hikes coming in June and July. As such, most Fed speakers in the coming weeks are likely to reinforce the Fed Chairs’ hawkish message keeping the pressure on rate and equity markets in the coming months.
Fed Chair Powell stated last week that he is confident he can engineer a soft landing, however, his optimism appears somewhat misplaced. Most Fed tightening cycles have typically ended in recession.
In the event, that the Fed can’t thread the needle and the global economy enters a recession, the average decline in the S&P 500 over the past 11 recessions has been 26 per cent. Currently, the S&P 500 is 15.5% below its bull market, November high.
While a recession is no certainty, the downside risks are building. Last week the U.S ISM manufacturing data fell for a second straight month. A slowdown was seen in the production, new orders, and employment components.
This coming Friday, the University of Michigan consumer sentiment, is again expected to print at recessionary levels on concerns over rising inflation, the war in Ukraine, expectation of aggressive central bank tightening and elevated energy prices.
The preferred way to position for an intensification of the downside risks is to look to sell a bear market rally towards 4300 with a stop placed at 4425. The target would be a retest of range lows 4100 area.
Source Tradingview. The figures stated are as of May 9, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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