Following Wednesday’s falls for stock markets and major currency pairs, it remains to be seen whether sentiment towards risk has turned decisively negative or whether it was just profit-taking and a short-term pullback from overbought levels.
It is important not to jump to any conclusions, even if the longer-term macro backdrop points towards risk-off, with virus cases spiking in parts of Europe again,
Brexit concerns simmering, valuations being lofty, and there is a big risk the economy may not recover as strongly or as quickly as had been priced in by US markets. Sentiment could just as quickly recover in the short-term, for example because of a Covid-19 vaccine potentially being approved in the near future, or if another pandemic relief package is potentially approved by US congress soon. And with regards to the FOMC minutes, yes they did reveal that policy makers at the Federal Reserve were concerned that coronavirus posed “considerable risks” to the economic outlook, but this is not something rationale investors would have been surprised about. Indeed, the Fed has zero intention of tightening its policy – quite the contrary in fact, with “several” officials suggesting that “additional accommodation would be required to promote economic recovery and return inflation to the committee’s 2 per cent objective.”
So, while the near-term outlook remains as clear as mud, in the slightly longer-term outlook it is very difficult to remain bullish on US equities without witnessing a sizeable correction first.
Source: ThinkTraders
From a technical point of view, the S&P 500 has reached its main objective of probing liquidity just above its prior record high at 3397. So, what we need to look out for next is whether profit-takers on the long side and short sellers will now exert some real pressure to push the index back down to longer-term support levels, or we simply consolidate for a while before breaking to fresh unchartered grounds. Short-term support comes in around 3340ish, which ties in with the support trend of the bull channel, followed by 3292, an old resistance level. It should be noted that even if we do see a deep correction to for example the 200-day moving average, this will not necessarily mean the long-term bullish trend would be over. Indeed, strong trends usually last for significantly long periods and in any case, they will need to weaken first before completely reversing. It should be noted that the major FX pairs, gold and US indices had reached extremely overbought levels, so a pullback was always going to happen anyway.