Stocks off worst levels but interest rate fears linger
Fawad Razaqzada March 1, 2018 2:15 PM
After the sharp sell-off yesterday, European stocks started March on a negative note and were down across the board first thing this morning while US index futures had extended their falls, too. However, the indices then managed to bounce off their lows ahead of the opening bell on Wall Street. As a result, the losses for the European indices were trimmed and US index futures actually turned positive as the S&P futures reclaimed 15 points. But will there be more turns and twists when the cash markets open?
February was a bad month for the global stock markets, although it could have been even worse had it not been for that large rebound that started around the second week of the month. Still, the major global indices all closed lower with the benchmark S&P 500 shedding 3.9% to record its first monthly decline since March 2017. The FTSE All World index fell slightly more as it recorded its first monthly drop since October 2016. Yesterday’s sell-off was partly driven by month-end rebalancing as fund managers decided to trim their cash holdings in the event the weakness persisted in March.
Sentiment has been hit mainly because of concerns over higher future interest rates, causing investors to withdraw from equities. According to the Investment Company Institute (ICI), nearly 50 billion dollars were pulled from US stock funds in the first three weeks of February. This was the largest outflow on record in terms of dollar value, surpassing the previous peak in July 2002 when ICI’s data collection started.
The latest sell-off was triggered by hawkish comments from the new Fed chief Jerome Powell. He is due to testify again today, but I doubt he’ll say anything new this time. The markets know he’s leaning towards the hawkish side and the dollar has responded accordingly. The resulting rally on the dollar has weighed further on US stocks, as a strong currency is expected to hurt exports and earnings when the overseas profits are repatriated.
But it remains to be seen if the sell-off will continue this time given the size of the recovery last month. After all, yields have eased back this week, so at least the bond markets are not showing any further warning signs...yet.
However sentiment could easily get damaged, for example, in the event the upcoming Italian elections on Sunday throws an unwelcome surprise. On top of this, fears over a hard Brexit remain high as frictions over the Irish border illustrates just how far apart the UK and EU are in terms of reaching an agreement. So, there’s a possibility that the EU markets may get a hammering from these risk events, although with the dollar rising and the pound and euro falling, this should offset some of the weakness.
Still, the outlook on the US markets don’t look too great. Not only are US equities severely overvalued in whatever valuation metric you use, the prospects of higher interest rates means we may be near the top, if we haven’t seen it already.
From a technical point of view, it is not uncommon that when long-term trends turn that you see large pullbacks. So, the rebound on Wall Street from the second week of February may actually have been a retracement in a bear trend.
But we can’t say that for sure yet. That’s because the S&P future has managed to reclaim a pivotal area between 2667 and 2770. The upper end of this level was the high from last year. The lower end is an untested broken resistance level. The 2018 opening price comes in at 2675. So, we could easily bounce back here.
However, if we go back below this 2667-2770 range, then the bulls may get in real trouble. Indeed, the bears would be quick to point out that the index’s failure to hold above 2755 support may be a sign that the bulls may have got trapped and that the trend has trend lower again. Still, for the sellers to really come back in force, they do need to push the index below that 2667-2770 range soon.
In terms of resistance, if the buyers manage to hold their own around these levels and successfully hold the index back above yesterday’s low of 2712 then the next point of reference is at 2742, which was the low on both Friday and Monday. Further ahead, 2810 is the next significant level to watch.
Source: eSignal and FOREX.com. Please note, this product is not available to US clients
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.