Stocks extend drop on Yellen comments – but downside could be limited

For a minute, it felt like Janet Yellen had been back to her former role as the Fed chair. Already sharply lower on the day, US stock indices fell further and the dollar rose as investors panicked on the back of headlines quoting Janet Yellen that interest rates may have to rise to stop the economy overheating. The Nasdaq fell nearly 400 points and other indices also slumped, while gold and silver reversed sharply off their earlier highs as the dollar extended its advance.

Yellen’s remarks intensified investor worries about the prospects of the Fed tightening its monetary policy sooner than expected, after the FOMC member Kaplan had last week also suggested that the central bank should start talking about tapering bond buying soon – contrary to what Chairman Powell had said earlier in the week.

It remains to be seen how much further will stocks drop as rate hike concerns may be shrugged off once again by the Fed. What’s more, optimism over economic growth means the downside for stocks will probably be limited. It is likely that even when the Fed and other central banks start tightening their belts, interest rates will still remain very low and thus favourable.

So, keep a close eye on the indices as they could find buyers once again after the latest drop.

The Nasdaq 100 was testing a key short-term support area at the time of writing around 13400, where previous resistance converges with the bullish trend line:

Source: ThinkMarkets and TradingView.com