S&P 500 analysis: Risk off remains dominant theme

• S&P 500 analysis: Stocks could drop further as US 10y bond yields close in on 5%
• Sentiment remains bearish as geopolitical unrest amplifies market uncertainty
• Lighter economic calendar but plenty of FedSpeak today

It was “risk off” again first thing this morning as Europe’s leading indices fell along with US index futures following Wednesday’s selling. Though the indices bounced off their lows by mid-day London, it remained to be seen whether the markets will be able to regain their poise meaningfully. Recent recovery attempts have all been futile. This could be another one.

Sentiment remains downbeat

The current risk appetite remains conservative at best, due to the prevailing economic uncertainties and heightened geopolitical risks emitting from the Middle East. With interest rates at their highest levels since the financial crisis and the lingering uncertainty regarding inflation, investors are pondering the future economic landscape. While signs indicate a peak in inflation and the likelihood of looser monetary policies in 2024, the duration of elevated inflation remains uncertain, casting doubt on the longevity of high interest rates. Consequently, investors appear happy to keep selling government bonds, driving their yields higher. Additionally, the recent Middle East crisis has further fuelled concerns, pressurizing risk assets.

S&P 500 analysis: Stocks could drop further as US 10y bond yields close in on 5 pc

Today we saw a fresh peak in US 10-year yields for 2023, edging ever closer to that critical 5.00% mark that everyone is watching. The renewed rise in yields was responsible for the drop in Wall Street shares on Wednesday. The surge in US 10-year Treasury yields, perhaps a delayed reaction from robust US retail sales data earlier, has taken the forefront in global financial markets. For as long as yields remain elevated, this should keep risk appetite low.

Lighter economic calendar but plenty of FedSpeak

Today’s notable events on the economic calendar include several Federal Reserve speakers, particularly Fed Chair Jay Powell at 17:00 BST. The Fed has kept the door for a final rate hike open, but in light of the recent upsurge in bond yields, Powell may try and ease market concerns by indicating that rates are already at a peak.  

We will also have some second-tier data to look forward to, including the release of the weekly jobless claims and Philly Fed manufacturing index, both at 13:30 BST, and existing home sales and CB leading index at 15:00 BST. Recent economic pointers from the US have been decent, and the ongoing absence of lay-offs in the jobless claims data continues to be a surprise element in the US data performance. Let’s see if jobless claims will start to rise as the economy slows down.

Geopolitical unrest amplifies market uncertainty

Although the stock market attempted a recovery this morning, the absence of positive fundamental factors to significantly alter investors' risk appetite suggests the possibility of sustained market pressure. In Europe, the DAX and FTSE look quite vulnerable and recent price action point to further potential losses.

It is also worth watching the currency markets for further volatility, especially risk-sensitive commodity dollars, like the NZD. Recent FX correlations with the stock markets suggest that a sell-off could lead to the dollar maintaining gains at the expense of commodity currencies. Despite the Australian dollar being undervalued from a macro perspective, it might face substantial impact as a high-beta victim during an equity sell-off, possibly dragging down cross rates like AUD/JPY. It is also worth pointing out that GBP/USD has shown a notably strong positive correlation with the S&P 500, compared to the EUR/USD.

Focus Turns to US Tech Earnings

The US earnings calendar is getting busier. With banks now out of the way, the focus is slowly going to turn to technology stocks. We have already heard from Tesla and Netflix. Next week, we have the following companies reporting their results:

• Microsoft, Tuesday October 24
• Alphabet, Tuesday October 24
• Meta, Wednesday October 25
• Amazon, Thursday October 26
• Apple, Thursday November 2

Earnings from these big tech giants are expected to grow which explains why the Nasdaq has outperformed some of the other major indices. Tech giants are expected to deliver better profits thanks to cost-cutting, resilient growth and AI prospects. However, the bar is set high, and it wouldn’t take much to disappoint expectations. Equally important will be what these companies will say about future growth. The market is always forward-looking. If they forecast a slowdown in earnings for future quarters, then this could see tech shares struggle to stay afloat.

HERE is our full tech earnings preview by my colleague Joshua Warner.

S&P 500 technical analysis

The S&P 500 closed back below the August low of 4335, thereby invalidating the recent bullish structure that had been created above this level and around the 21-day exponential moving average. With the index now back below the 21-day, we could see an accelerated sell-off, especially if accompanied by bond yields breaking the 5.0% level. The next downside target is the 200-day average at around 4245. Below this, we have the recent support area around 4200 to keep an eye on. On the upside, that 4335 remains the most important short-term resistance to watch. But even if we go back above that level, this won’t necessarily be the end of the bearish trend. At some stage, the S&P will need to form a higher high to suggest the bearish trend that started in July, is over. Until we see such a signal, the bulls should proceed with extra care, as the selling could easily gather momentum.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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