The S&P 500 broad
market index futures are trading mostly unchanged at around 4952 points this
week. The index posted a new all-time high at 4974 points
last Friday despite a very strong U.S. labour market report for January.
The report revealed that unemployment remained
unchanged at 3.7%, missing expectations of 3.8%. Average hourly earnings rose
by 0.6% MoM, exceeding the anticipated 0.3% and the 0.4% reported in December
2023. Most surprising was the Nonfarm Payrolls, unexpectedly adding 353,000 new
jobs against the expected 185,000. Additionally, December 2023 data was revised
upward to 333,000 from 216,000.
These significant changes led to a decline in
bets on interest rate cuts in March to 15.5%, down from 46.0% at the beginning
of the last week and 76.0% a month ago, according to the CME FedWatch Tool.
U.S. 10-year Treasuries yields surged to 4.10% from 3.81%, and the Dollar
strengthened by 0.7%.
Considering these developments, the rally of the S&P
500 index appears somewhat irrational and potentially based on inertia. Investors have been withdrawing money from the SPDR S&P 500 ETF
Trust (SPY) for the past five weeks out of the last six, reporting a $747
million outflow last week.
Federal Reserve (Fed) Chair Jerome Powell, in
an interview with CBS’ “60 Minutes” over the weekend, reiterated points made
during the January 31 press conference after the FOMC meeting. While this
interview had a minor effect on the markets, it contributed to an overall
pessimistic atmosphere.
This week's events, including the Reserve Bank
of Australia's (RBA) monetary policy meeting, the Atlanta Fed's release of its
GDPNow estimate for Q1 2024, and China's January inflation data, are unlikely
to offset this sentiment.
The S&P 500 broad
market index has surpassed the final upside target zone at 4850-4950 points,
suggesting a correction window may open in mid-February. Consequently,
betting on a rally before that could be risky. Reversal patterns should be
anticipated, with the first already emerging, signaling a standard correction of
5-7% within the next two months. The starting point of this correction is yet
to be defined.
Oil prices are stalling, failing to break
through the resistance at $82.00-84.00 per barrel of Brent crude, and falling
towards $72.00-74.00. The easing tensions in the Middle East amid peace talks
between Israel and Palestine suggest that prices are likely to continue their
descent.
Gold prices, having reached mid-term upside
targets at $2000-2100 per troy ounce, are testing the support at $2010-2030 per
ounce. De-escalation in the Middle East and rising Treasuries yields are
weighing on prices, potentially leading them to $1920 if the support at $2010
per ounce is breached.
The U.S. Dollar has recovered all of its
losses from last Friday and continues to strengthen. Expectations of another
wave of the upcoming downside correction for the Dollar were diluted by strong
labour market data. However, it remains risky to bet on both the rising and
declining EURUSD. A return to the 1.11500-1.12500 area for the pair is likely,
but a drop to 1.05000 should not be excluded.