The usual summer decrease of volatility and stabilization in the U.S. stock market could be doubted as the S&P 500 broad market index is breaking crucial support levels with ease. So, whether or not we will see a summer pause before stock market collapse in autumn is now questionable.
The S&P 500 index broke through the strong support at 4130 points at the beginning of the week and continued down to 3800-3900 points, the level that in a normal situation could be expected to be reached at the beginning of June. By the end of the week the stock market rebounded slightly as the S&P 500 index reached 3970 points. But this rebound looks fragile. The index has to close this week above 4030 points, or at least spike 4070 points to continue up. Otherwise, it may continue down aggressively towards extreme downside targets at 3500-3600 points.
The opening of any new trades under such circumstances would be performed after a bit of guesswork. April’s CPI in the U.S. slowed down to 8.3% compared to 8.5% a month before and the PPI index dropped to 11.0% from 11.5% in March. However, the Federal Reserve (Fed) seems to be ignoring an upcoming economic decline of target inflation. Fed’s Chairman Jerome Powell said he cannot guarantee a so-called soft landing for the economy as the Fed is raising interest rates to tackle inflation. “So a soft landing is, is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now, for a couple of reasons,” Mr. Powell said.
“We did the best we could,” Fed’s chief said, but it seems that the new anti-inflation program of the Fed could be hardly called “the best we could”. So, it looks like the “Captain” must made a public announcement to the passengers along the lines of – “Nothing to worry about, we are falling. Many of you would die (in a financial sense), especially those who are sitting close to the tail, but it is not the reason to turn the autopilot off. Direct mode we will turn on only in case the cabin crew (the Fed, large banks and pension funds) would be in real danger. Only then we would switch to Japanese-style monetary policy (to control bonds yield curve and direct purchase of shares in the market) to ease monetary policy.”
The drop of the S&P 500 index by 19% from its recent highs is not a serious threat for the “cabin crew” and the “Captain”. Thus, a steady decline of the stock market would continue. Some correction could be possible, but they could not create serious risks to short positions that were opened at 4480-4530 points.
The oil market’s are ready to spring into action and make the extreme scenario of Brent crude prices at $160-180 per barrel possible. This jump may start at any time in the second half of May. A breakthrough of the resistance at $112-115 per barrel would indicate that the scenario is active.
Gold prices are diving towards $1730 per troy ounce. Once this level is be broken prices may plunge to $1300-1400 per ounce. Gold prices are under serious pressure amid rising interest rates and forced liquidation by investors to maintain important positions in the stock market.
The Greenback continuous to strengthen as the EURUSD dipped to 1.03500-1.04500, an extreme level that has not seen since late 2016. On one hand, it may prompt investors to look for the long position entry points, but on the other hand, S&P 500 futures have not provided any signals that the upside correction would continue. Thus, the Greenback may continue to strengthen, and it is better to wait until a clear signal emerges.
GBPUSD continues towards the downside, tipping to the extreme level of 1.21650. It is close to the support level at 1.22400. However, the Cable is well known for its elevated volatility. So, it may bring an unpleasant surprise, and it is better to wait for a solid buy signal with the targets at 1.27000-1.28000.