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S&P 500 Needs Support From Dovish Fed and Positive Trade War Talks

S&P 500 Needs Support From Dovish Fed and Positive Trade War Talks

2019-01-04 17:00:00
Justin McQueen, Analyst
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Equity Analysis and News

  • Risk Barometer Shows Persistent Bearish Momentum
  • S&P 500 | Eyes on US-China Trade War Talks
  • Fed Tone Shifts

Risk Barometer Shows Persistent Bearish Momentum

New year and same problems now amplified for equity markets. The risk barometer continues to paint a negative picture for US indices with cyclicals continuing to underperform defensive stocks (measured by the spread between the XLI and XLP ETFs). Accompany this with deteriorating US data, most notably the US ISM Mfg. PMI, which saw its largest fall since the financial crisis and US treasury curves beginning to invert (1s10s inverted for first time since 2007), you begin to have the makings of a notable slowdown. Fed pricing has now seen a notable shift, where money markets now believe that the next Fed rate move will be a cut (maybe too much bearish pricing).

S&P 500 Needs Support From Dovish Fed and Positive Trade War Talks

Source: Refinitiv: Spread between SPDR Industrial Sector Select Fund and SPDR Consumer Staples Sector Select Fund

S&P 500 | Eyes on US-China Trade War Talks

As Apple served as a reminder that trade wars can have negative ramifications, eyes will be on the fallout from US-Chinese trade talks at the beginning of next week (take place on Jan 7-8th). Positive rhetoric could see the S&P 500 continue to retrace losses, however, eyes are on resistance at 2520, in which a break above can stoke a push towards 2600. Key support is situated at 2350.

Fed Tone Shifts

Alongside this, the Federal Reserve have begun to shift towards a more dovish stance with the typically hawkish Fed’s Mester suggesting that the Fed could pause rate hike cycle, while Fed Chair Powell has signaled that they could alter balance sheet reduction if it had been causing market turbulence. Consequently, dovish Fed speak could keep equity markets afloat for the time being.

S&P 500 Price Chart: Daily Time Frame (Aug 2018 – 2018)

S&P 500 Needs Support From Dovish Fed and Positive Trade War Talks

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--- Written by Justin McQueen, Market Analyst

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