Stocks are attempting to steady themselves after yesterday’s sharp rebound, although the early tone was a touch softer as oil prices picked up again with Brent reaching $103 per barrel on the back of continued crude disruptions in the Strait of Hormuz. That said, oil prices have eased off their earlier highs and European equities managed to claw back from their initial lows, which in turn helped limit the downside in US index futures. For now, there’s very little on the radar beyond developments around the conflict and movements in oil, so it wouldn’t be surprising to see a more cautious tone ahead of tomorrow’s FOMC decision. For now, we maintain a cautious S&P 500 outlook, although there are tentative signs that the markets are trying to bottom out.
Markets attempt to price in end of conflict
There is a growing sense that markets are trying to look through the current tensions. Comments from President Trump suggesting the conflict could wind down relatively soon have encouraged some to price in a reopening of flows through the Strait of Hormuz. That optimism, albeit tentative, has helped to lift equities off their lows.
At the start of the week, risk sentiment improved modestly, largely on the back of slightly softer oil prices. We saw pullback in the dollar, with markets latching onto any signs that supply disruptions may ease. There’s even some chatter that certain vessels are being allowed safe passage, which would reinforce the idea that the worst-case scenario may be avoided.
Still, markets aren’t getting carried away. Efforts by the US to build a coalition to secure the Strait have so far met a lukewarm response from allies, suggesting traders aren’t fully buying into a smooth resolution just yet. A credible multinational effort would likely push oil lower and equities higher—but the best outcome would be to end the war and soon. But if the conflict drags on, the risk is that it starts to weigh more heavily on stock markets again.
Will central banks raise inflation alarm bells?
On the central bank front, attention is firmly on how policymakers will respond to the inflationary implications of higher energy prices. The Reserve Bank of Australia has already moved, delivering another rate hike overnight, setting the tone for what could be a busy week.
With both the Fed and ECB due, the key question is whether central banks lean hawkish in response to elevated oil prices, or adopt a wait-and-see approach given the geopolitical backdrop. The former would likely cap any equity upside, while the latter could offer some near-term support.
Ultimately, oil remains the dominant driver. Headlines around the Strait of Hormuz continue to dictate market direction, and rightly so given that roughly a fifth of global supply passes through the route. If flows normalise, oil prices could unwind sharply, especially with additional supply from elsewhere already filtering through – be it from Russia, Venezuela or those emergency reserves. But until there’s clear confirmation on that front, markets are likely to remain reactive, and somewhat on edge.
Technical S&P 500 outlook: Trying to form a base?
Despite all the concerning headlines surrounding the Iran conflict and other geopolitical tensions, we haven’t seen any major breakdown in the market. That suggests the S&P could be trying to form a base here, particularly if the situation in the Middle East improves and we see further de-escalation.
If that plays out, the S&P 500 could begin a new bullish trend after this prolonged period of sideways consolidation.
However, before turning decisively bullish, the index needs to clear some key resistance levels. On the US SP 500 chart, which is derived from the underlying S&P 500 futures, the highlighted zone (in grey) sits between 6,731 and 6,782. This area has seen significant price action.
For example, in December, the market formed a low in this region before heading to new highs. In early February, we saw another bounce there. The market then tested this zone multiple times in early March, before finally breaking down.
Notably, there has been limited follow-through to the downside despite ongoing geopolitical risks and other bearish factors. Now, the index is retesting that same area from below. This makes the zone particularly important.
If the bulls can reclaim this 6,731 - 6,782 area with a daily close above it, that would likely act as a green light for a stronger recovery.
The 200-day average is key
On the support side, the S&P 500 has already bounced twice from the 200-day moving average, which is still trending higher. This indicates that the long-term trend remains technically bullish.
That said, things would shift if we see a daily close below the 200-day moving average. Given how widely this indicator is followed, its importance cannot be overstated.
The 200-day moving average comes in around 6,630, followed by yesterday’s low at 6,607. That level now acts as the line in the sand.
A break below 6,607 would invalidate the recent bullish signals. In that scenario, the index could move lower to take liquidity below the November low at 6,507.
In short
All things considered, the lack of a deeper sell-off—despite heightened tensions during the Iran conflict and the surge in oil prices—suggests underlying strength in the market.
For that reason, I currently lean more towards the bullish case than the bearish one in this S&P 500 outlook.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
