S&P 500 weekly outlook: surging oil raises stagflation fears

A disappointing jobs report was among a growing list of factors that knocked the wind out of equities on Friday, with financials taking the brunt of the sell-off. The drop arrived at a time when rising tensions in the Middle East have sent oil prices soaring and stoking fresh inflation concerns. On top of this, renewed unease around the private credit sector further dampened risk appetite. There was not much for the bulls to get excited over. Unsurprisingly, investors sold stocks and the S&P 500 slid 1.3% on the day, leaving the benchmark nursing its worst weekly performance since October. Unless there’s a sharp improvement in the Middle East situation, markets could head further lower in the week ahead and may even gap lower on Monday.  Our S&P 500 outlook remains cautious with a bearish tilt.

 

Week ahead: it is all about oil prices

 

With not much on the calendar in the week ahead, it will all be about oil prices, which continued to surge on Friday. US crude pushed above $90 a barrel, marking its largest weekly gain on record as traders priced in the risk of deeper disruption across global energy supplies.

 

With no obvious signs of de-escalation in the Middle East, the conflict is increasingly spilling into energy markets and fuelling concerns about renewed price pressures. This is the key theme to watch in the week ahead, and you can almost forget about everything else. The longer the conflict continues, the worse the situation will get for oil prices and the global economy.

 

Stagflation risks put the Fed in a tricky spot

 

A negative payrolls print arriving alongside a sharp jump in oil prices is the kind of combination that inevitably revives talk of stagflation. That’s a mix of slowing growth and persistent inflation. If the labour market were to weaken meaningfully, it would normally strengthen the case for rate cuts. But the risk that sustained higher oil prices could reignite inflation leaves the Fed in a difficult position. Policymakers may ultimately decide that the safest option, at least for now, is to stay on the sidelines and wait for greater clarity.

 

With Trump calling for "unconditional surrender" by Iran, the odds of a quick resolution has fallen further. This could lead to continued fighting and bombardment, and retaliation. Ultimately we could see even higher oil prices and a further drop in equity markets in scenario.

 

Non-farm payrolls adds fuel to recession worries

 

The US jobs report for the month of February was a massive disappointment. The economy lost 92,000 jobs during the month, with the unemployment rate rising to 4.4%. That was well below expectations, which had been for a gain of around 55,000 jobs.

 

More worryingly, the private sector shed 86,000 jobs during the month, highlighting underlying weakness in the labour market.

 

On top of that, there was a 69,000 downward revision to the previous couple of months’ data, which ultimately led to negative job growth for December. That revision is arguably the most concerning part of the report, as it suggests the labour market had already been weaker than initially thought.

 

S&P 500 weekly outlook: technical analysis and levels to watch

 

 

Our US SP 500 chart, which tracks the underlying S&P 500 futures, broke below a key support zone between 6765 and 6775 on Friday and held below it on a closing basis. If the index holds below this level in early parts of next week, then the sellers could gain the upper hand and drive the market sharply lower.

 

Initial support is seen around Friday’s and recent lows of 6731 to 6710 area. Below here, there are no obvious nearby support levels until the November low at 6507. That could become the next downside target if bearish momentum continues to build.

 

In terms of resistance, the key short term area to watch now is that broken support between 6765 and 6775 area. Above that, 6815/16 is the next potential resistance followed by Friday’s high at 6847. If the market manages to break above that level, it would signal underlying strength and suggest that, despite everything happening in the background, the market is not ready to fall. That would be a very strong signal for equities.

 

What else to watch in the week ahead?

 

Judging by Friday’s price action, and recent events, the outlook isn’t particularly encouraging right now. A lot will now depend on the situation in the Middle East.

 

From a macro point of views, it is not a super busy week next week, with much of the focus likely to remain on geopolitics in the Middle East. Still, a couple of important data highlights are scheduled which could cause some short-term noise at least.

 

1. US CPI Inflation Report

Date: Wednesday, March 11

Time: 12:30 PM GMT

 

The US Consumer Price Index is expected to show inflation running at 2.5% year-over-year, up from 2.4% the month before. With crude oil prices soaring in recent weeks, there is a possibility that inflation pressures could increase again in the coming months. If the data shows that price pressures had already remained high in February, markets may begin to price in a longer period of higher interest rates, which could provide additional support for the US dollar and undermine equities.

 

2. US Data Dump

Date: Friday, March 13

Time: 12:30 PM GMT (main releases)

 

Friday will bring a series of important US economic releases, including the preliminary GDP estimate, Durable Goods Orders, and the Core PCE Price Index, which is the Federal Reserve’s preferred measure of inflation. Later in the day, markets will also receive JOLTS job openings data and the University of Michigan consumer sentiment survey, including inflation expectations. Investors will evaluate these reports collectively to assess the overall strength of the US economy and what it could mean for the outlook for interest rates and the markets.

 

Daylight saving time shift in North America on Sunday

 

Finally, it is worth pointing out that London will be 4 hours behind NY for the next three weeks as US and Canada switch to daylight savings on Sunday, with Europe to follow on 29^th March. This means that regular US data releases will come out one hour sooner for European investors, and that also applies to the regular market opening and closing times.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R