Weekly Markets Diary - Indices
US 500 Weekly
Today we will review the US 500 as it remains the dominant global equity index.
We have had dire updates in recent days from market heavyweights FedEx and Ford, with both falling well over 10 percent in a day. We should take this as a warning about the tough outlook.
Despite this, overall earnings for the US 500 are yet to be significantly scaled back. Goldman Sachs recently warned that the US 500 retracing back towards 3,200 was possible in the months ahead if earnings were to fall at the lower end of the range of current projections.
This weekly chart shows that, despite nervousness from the likes of FedEx and Ford, the market is still holding up above the summer lows. These lows were, hopefully, the market fully pricing in the expected higher interest rate environment. So, lows under there may only occur if the earnings compression becomes a wider reality.
US 500 Daily
Moving to the daily chart, we can see this ongoing market debate in more detail. We saw a decent recovery in prices late in the summer in the belief/hope that the majority of the new higher interest rate environment had been priced in.
The Federal Reserve has repeatedly stated it remains committed to combatting inflation, even if this does increase the risks of a harder landing. The late summer rally appeared to be more out of hope than fundamentals.
We have since seen price action drop back towards these summer lows. Moves around 3,600 would cause nervousness as this could signal a more serious retracement of the stellar gains posted from the 2020 pandemic lows.
Of course, the Federal Reserve announces its rate decision this evening, and barring a full 100bp move higher it could result in a minor relief rally from these current depressed levels. The question then would be: just how sustainable would such a relief rally be?
Also, would these buyers be able to stand any further earnings shocks that may come over the next few weeks? We remain cautious that any such relief rally may prove to be yet another bear market rally, with moves well above 4,300 required to feel more comfortable that the outlook was improving.
This leaves a broadly negative skew for the medium term, with the possibility for a FOMO-based relief rally. Moves under 3,600 on any Fed shock could cause quite rapid selling and would be likely to affect other risky assets, such as cryptocurrencies and other leading equity indices.