The Federal Reserve meeting this week ended extremely mournfully for the market. Fed’s Chairman Jerome Powell has decided to continue bluffing, as he expressed no anxiety over rising debt market interest rates.
Investors replied immediately with a rough response. U.S. ten-year Treasuries’ yields jumped to thirteen-month highs at 1.75% leaving stock markets no option for a continuous rally. A rapid rise of interest rates resumed throughout all maturities. Yield for long-term bonds are already above prepandemic level. However, this time U.S. economy is weaker than in the beginning of 2020. Thus it would hardly sustain such high interest rates for a long time.
So, we may consider that the Fed has silently approved significant market correction. Now we only have to wait for a major reason that would trigger the correction forcing the Fed to use one of the least option to control yields’ curve.
The most appropriate reason recently seemed to be the health of 78-year old U.S. President Joe Biden. However, a new story of U.S.-China tensions seems to reappear. The first meeting of top officials of new Joe Biden’s Administration and Chinese top diplomats in Alaska is expected to be contentious and would likely end without any documents signed. Both sides are far from backing down hard line stances or even prepared to ease the pressure. The United States recently announced another portion of sanctions against Chinese companies and officials signaling that swift actions would quickly and decisively remove Chines treat to U.S. global leadership. Alaska was probably chosen to demonstrate the attitude of the U.S. new Administration towards China.
So, we just have to wait for something that might trigger the massive correction even in a few days. The broad market S&P 500 index in case of the correction may plummet to 3350 or even to 2850 points.
Oil market is already entered the correction as Brent crude prices dived below $65 per barrel. If we consider the debt market developments, weak industry data and a treat of Iranian oil to return to the market prices may drop much further.
Gold prices are also going down. The only chance for gold prices to hold above $1700 per troy ounce is a major political escalation between the United States and China. Otherwise, long-term targets for gold prices at $1400-1450 per ounce would be within arm’s reach.
The Greenback is extending its gains attracting more investors’ attention. Any correction in the stock market would just speed up the strengthening of the U.S. Dollar. This process could be easily spotted not only in EM currencies but for G7 currencies too.
The EURUSD is trying to leave the orbit of the weekly resistance level at 1.19400 to slide to 1.15300.
The same picture is in GBPUSD, where weekly support level at 1.39150 has become too flimsy to hold the paid from sliding to 1.35100. The Bank of England has provided no support for the Pound. Therefore, the Cable is set do decline as risk off sentiment will substantially increase.
The USDJPY is close to begin a reversal movement from current resistance levels at 109.00-109.50. But, to initiate this decline a correction of the U.S. stock market is needed. Moreover, at the beginning of this correction the Yen may weaken to 110.50, and then make a reversal move downwards.