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S&P 500, Nasdaq 100 Squeeze as the Bank of England Pivots – Fed to Follow?

S&P 500, Nasdaq 100 Squeeze as the Bank of England Pivots – Fed to Follow?

Brendan Fagan, Contributor

S&P 500, Nasdaq 100, Bank of England, Federal Reserve - Talking Points

  • S&P 500 holds 3620 level, squeezes through 3700 with ease
  • Nasdaq 100 builds on Monday’s strong close, 11500 eyed
  • Bank of England pivots to prevent chaos in domestic bond market

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Risk is flying during the US session as traders digest major news out of the UK, where the Bank of England (BoE) announced a major policy pivot after days of major market fluctuations. The BoE announced the suspension of planned gilt sales, while also stating that the bank will purchase longer-dated bonds on a temporary basis. The move comes following a major rout of the British Pound and gilt markets, which both saw declines of historic proportions. The move by the BoE has posed the question – will the Fed follow suit?

Following the announcement this morning, US markets soared as traders moved to price in bets that the Federal Reserve could soon follow the Old Lady in changing course. The potential for a pivot has seen a sharp decline in the US Dollar Index as well as US Treasury yields, which has offered equities a major boost. The 2-year Treasury yield is down more than 20 bps from the weekly high of 4.36%, while the 10-year yield continues to retreat away from 4%.

The bid into USTs allowed for a major ramp in risk assets during the US session, with S&P 500 futures (ES) soaring out of the 3620 support zone. Price has since sliced right through each resistance level during its ascent, with ES returning to the battleground at 3720. The relentless push by bulls to return the auction to this area over the last week is meaningful, and indicates that they are not quite ready to give way at the June lows. This will certainly be the zone to watch, as the last test of this area during Tuesday’s trade saw a major dip into the 3640 area. With both headline risk and quarter end flows driving price action currently, ES may continue to squeeze as traders round out a quarter that truly felt like a decade. Should 3720 break, the 3756 area may offer itself as initial resistance.

S&P 500 Futures 1 Hour Chart


Chart created with TradingView

Like ES, Nasdaq 100 futures (NQ) have returned to a major inflection point at 11500. Monday and Tuesday both saw tests of this level firmly rejected, with price falling below 11150. The battle in this area will be key as traders react to the large moves in the global bond markets. With PCE to come on Friday, traders may want to reflect on what happened into and following the CPI print for August just a couple of weeks ago. A massive ramp into the print was followed by an extremely sharp drawdown, which has left us at the levels we find ourselves at currently.

Nasdaq 100 Futures 1 Hour Chart


Chart created with TradingView

While traders may rejoice at the prospect of lower yields, it will remain important to remember why bonds may catch a bid in the coming weeks and/or months. When the Fed ultimately pivots policy, it will not be because a recession is coming; the recession will likely already be here.

Equity markets have yet to see material downgrades to 2023 earnings estimates, as many still feel a “soft landing” is possible. With such a hot labor market, the Fed has made it clear that the primary focus is inflation. As corporate America kisses goodbye to an era of “easy money,” the focus now turns to which companies can post meaningful earnings that aren’t fueled by stock buybacks.

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--- Written by Brendan Fagan

To contact Brendan, use the comments section below or@BrendanFaganFXon Twitter

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