Weekly Summary: The Fed Thunders Markets

There is a real mayhem in the markets. The S&P 500 broad market index this Thursday made its worst performance since March 2023. It lost 1.8% in a single day extending its weekly drop to 2.8%. U.S. debt market is suffering as yields went sky high. U.S. 10-year Treasuries yields surged to 4.50%, the highest since 2007. 

Last year, when the yields for the same 10-year bonds reached 4.36% British pension system was on the verge of collapse. European debt market was very close to collapse too. Bank of England came a savior then extending unlimited credit line to pension funds. 

Now the yields are even higher, and could remain elevated for a longer period, according to Federal Reserve (Fed). Could financial systems of developed nations sustain this pressure, or would we see their surrender and another Lehman Brothers to blame in a new financial crisis?

Anyway, the Fed is responsible for the rising yields this time. On its meeting on September 20 it left interest rates unchanged at 5.50%, but provided dot plot projections indicating another 0.25% hike this year and less than expected rates cuts in 2024.This was shocking, and provoked massive sell-offs.

Other three central banks this week were rather dovish. Bank of England (BoE) and National Bank of Switzerland unexpectedly left their interest rates unchanged. Bank of Japan surprised everybody with its dovish rhetoric. It may seem they are simply afraid of further rise if borrowing costs. Nobody wants to repeat what was happening in September 2022 and March 2023, when the crisis hit the U.S. banking system. The pause in interest rates hike is not a guarantee, but it may provide some time for monetary policymakers to prepare for elevated volatility and a possible government shutdown in the United States in early October.

Meanwhile, Japanese government is ready to support its national currency despite dovish rhetoric from its central bank. Authorities are prepared to intervene the currency market, and to coordinate with other countries their efforts to support the national currency. So, we may see coordinated efforts to weaken the U.S. Dollar soon. Technically, the Greenback is ready for a downside correction. But there is always a reason to cancel this correction. The European Central Bank (ECB) has fended off this correction last week. This time the Fed and BoE forefended the weakening of the Dollar.

Technically, the S&P 500 index upside formation has changed to the downside with a primary target at 4100-4150 points and extreme targets at 3700-3800 points. The nearest support is at 4290-4310. Short trades could be considered once the strong support at 4390-4440 would be passed. 

Brent crude prices are hovering close to the resistance at $92.00-94.00 per barrel. The Fed has tried to stop oil prices to move towards $100 per barrel. But prices are still trying move up. The $96.00 per barrel threshold would allow prices to move up to $100.00-103.00 per barrel. The downside scenario may be activated it prices will return below $92.00 per barrel. Then they would dive to $82.00-84.00. If prices would fell below $74 per barrel a recession scenario with targets at $64-66 per barrel of Brent crude will be the option. 

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But, the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. Prices are gravitating to the support at $1910-1930 per ounce. If prices will fall below it, it would be better to be prepared to open short positions.

The Greenback is forming a reversal pattern. A long trade with a small amount for GBPUSD from 1.23300-1.23500 with a target at 1.26200-1.26400 was open. The EURUSD long trade from 1.06200-1.06500 with a target at 1.0800-1.08200 was open too. The long trade in the AUDUSD from 0.63800-0.64000 with a target at 0.66500 and the stop-loss at 0.63200 is still open.