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Nasdaq 100 Sheds Gains as Traders Sell the Rip amid Hawkish Fed Policy Outlook

Nasdaq 100 Sheds Gains as Traders Sell the Rip amid Hawkish Fed Policy Outlook

Diego Colman, Contributing Strategist


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  • U.S stocks fail to sustain gains and fall into negative territory amid souring risk sentiment on fears that the Fed tightening cycle may undermine valuations and the economy
  • The Nasdaq 100 wipes out large morning gains and finishes 1.2% lower as traders sell the rip
  • Prospects of aggressive monetary policy normalization will exacerbate volatility in the coming weeks and months, skewing growth and tech stocks to the downside

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U.S. stocks surrendered morning gains and posted moderate losses on Thursday in a wild and volatile session, one day after the Federal Reserve rattled nerves with some of its guidance and left the door open for forceful and assertive measures to contain soaring inflationary pressures.

At the closing bell, the S&P 500 sunk 0.54% to 4,326, undoing the 1.8% advance from early trading. The Nasdaq 100 also reversed a solid rally and plunged 1.2% to 14,003, dragged down by a sharp pullback in Tesla (TSLA: -11.55%), Nvidia (NVDA: -3.7%) and Intel Corporation (INTC: -7.04%) share prices.

Sentiment appears to be quickly souring on fears that the U.S. central bank will plow ahead with a steep hiking cycle and not ride to the rescue of the equity market, despite growing turbulence, a deep sell-off year-to-date, and the increasing likelihood of a hard landing.

For context, after the FOMC conclave concluded yesterday, Chairman Jay Powell repeatedly batted away opportunities during his press conference to clarify that the process to remove pandemic-era stimulus will be gradual, paving the way for a sharp downward shift in risk appetite.

When asked about the tightening roadmap, Powell indicated that there is quite a bit of room to raise rates, avoided ruling out the possibility of lifting borrowing costs at every meeting and didn’t discard a half-percentage point hike at its next gathering. Not surprisingly, Treasury yields repriced higher following these comments, but the moves have been significant in short-dated securities (short-end of the curve), leading to a substantial flattening of the 2s10s curve, a sign that Wall Street is losing confidence in the long-term recovery.

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Source: TradingView

Powell’s refusal to push back against a steep normalization path and his desire for flexibility may lead traders to challenge the central bank toward a 50-basis point adjustment in March. If investors come to fully discount that outcome, the Fed is likely to play along in line with its nimble approach to setting policy and to send the message that it has not fallen behind the curve in tackling inflation. This latter scenario will create more headwinds for equities in the near term, depressing sentiment, and risk appetite.

To navigate the transition to a less friendly environment in terms of accommodation, investors may continue to favor value-oriented companies with strong earnings and rising margins at the expense of growth and tech proxies with lofty valuations. Against this backdrop, it is difficult to foresee a sustained rebound in the Nasdaq 100. In fact, recent dynamics such as selling the rip may become much more common and frequent over the coming weeks and months.

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The Nasdaq 100 outlook has turned quite bearish following the recent correction, but the situation could improve if the index manages to stay above the monthly low in the 13,725 area. If prices do hold above that support in the coming sessions, buying interest could increase and pave the way for a move towards 14,450, followed by 14,800.

Alternatively, if sellers retake decisive control of the market, spark a retest of 13,725 and drive the tech benchmark below this critical floor, all bets are off. Under this scenario, we could see pullback towards the May 2021 low near the 13,000 psychological level.


Nasdaq 100 (NDX) chart prepared in TradingView


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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.