Nasdaq 100 analysis: US stocks in for rollercoaster ride as focus turns to Fed

• Nasdaq 100 analysis: Keep an eye on bond yields
• Tech stocks could be in trouble if Fed sends yields higher
• US futures higher after softer UK inflation fuels rally in European markets

Investors are obviously very concerned about inflation amid the latest crude oil rally and the still-rising bond yields. Yesterday, it was the hotter Canadian inflation data that triggered a selloff in stocks, while today it was a softer UK CPI print and weaker crude prices behind the firmer tone in equities during the European morning hours. That being said, traders are largely sitting on their hands, as they await clearer direction from the Fed and the several other major central bank meetings taking place this week. These central bank meetings have the potential to set the tone for several days or even weeks to come. So, a lot is at stake. 

Softer UK inflation fuels rally in European markets

At the time of writing, US index futures were trading near their session highs, boosted by a small decline in global bond yields. Unsurprisingly, UK yields led the falls, and FTSE led the major indices higher, after UK inflation came in weaker than expected, further boosting speculation that the Bank of England may opt for a “dovish rate hike” on Thursday. Still, US 10-year yields remained near their recent highs after reaching levels this week that were last seen in 2007, climbing to 4.37% on Tuesday. Unless yields start to fall back quickly, this is something that could weigh heavily on risk assets moving forward. A hawkish Fed could trigger a fresh rise in yields, while any hints that the rate hikes are done could provide at least some short-term relief.

Nasdaq 100 analysis: Keep an eye on bond yields

With the potential for oil prices to stay higher, this is raising concerns over inflation again, as we get closer to the Fed’s rate decision. Central banks in the UK, Switzerland, Sweden and Norway, as well as Turkey and Brazil, will all also be making their own policy decisions this week. Watch bond yields closely here, as they could dictate market direction for the next several weeks.

But apart from the fact that the Fed is hawkish, and interest rates are obviously high, is there something else that is keeping bond yields elevated? Are investors simply very confident about economic growth that they are buying record amounts of US debt? Or are the high yields a reflection of investors growing worried about something much bigger, like the ballooning US debt levels? If so, it makes sense to demand a higher rate of return for parking their funds in the so-called “risk-free” asset – especially when you consider that the government will need to keep borrowing and paying higher interest rate to do and costing it more to service it debt. Issuing more and more debt might be the only solution…which is not sustainable.

Nasdaq 100 could be in trouble if Fed sends yields higher

If yields continue to remain elevated, then this could be a big problem especially for longer-duration equities, those that are expected to produce their highest cash flows in the future Many of such companies are dominated in the technology sector, putting the tech-heavy Nasdaq 100 into focus.

While UK inflation was softer, on Tuesday we saw hotter-than-anticipated Canadian CPI data, which along with the recent upsurge in crude oil prices added to concerns about resurgent price pressures. The positive impact on the financial markets from UK CPI might be short-lived.

All the attention will be on the Fed today. At the moment, the market is pricing in about even odds of another rate increase before the year is out. If this is also reflected in the updated dot plots, or implied by Powell himself, then this could lift yields even higher and push stocks lower. Traders will also be watching for indications of whether the FOMC’s latest projections scale back the 100 basis points of rate cuts they had penciled in for 2024, back in June. If so, this would be interpreted as a hawkish signal.

Nasdaq 100 technical analysis

The Nasdaq remains inside a consolidation pattern, so there is no clear directional bias. But in more recent days, rally attempts have failed and a few short-term support levels have broken down. So, on balance, the path of least resistance is to the downside, especially when you consider the above macro risks. We therefore favour looking for further weakness in the short-term outlook.

The shaded region between 15210 and 15370 is now a very important resistance zone that could provide a ceiling for the index.

The bears must be happy to see the index make a few lower highs and holding below the 21-day exponential average, an objective short-term trend indicator. They would prefer if the index had printed a few lower lows too by now. If it breaks support at 14712 then we will have another lower low in place. That would put the bulls in a spot of bother. In that event, we could see follow-up technical selling for days to come.

The bulls meanwhile will want to see the index clear the trend of lower highs. A closing break above the short-term bear trend today would be very ideal from a bullish point of view. While I wouldn’t bet my house against that possibility, it appears as though the more likely outcome is a break lower first.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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