The decline of stock markets continued as throughout the week there was a feeling spiraling problems. First it was a possible Government shutdown in the United States, even they caused only a 4% decline in the market in average in the last 42 years, while median dynamics of S&P 500 broad market index was around 0% for this period.
Major troublemaker is the debt limit problem in the United States as the government would ran out of money by October 18, according to U.S. Treasury Secretary Janet Yellen. By reaching this date, United States may declare its first default ever, it the debt burden would not be lifted by then. However, the market does not believe in this scenario as it would practically mean the end of America-centered global financial system as we know it. Moreover, irreconcilable Republicans and Democrats had no slowdowns on keeping the U.S. government open by December 3 despite postponing a vote on Joe Biden’s massive $1 trillion infrastructure bill. So, it is almost inconceivable that they would have any troubles on lifting the debt ceiling.
More attractive matter is the energy crisis in some Chinese provinces, where governments imposed tight limits on energy consumption. Some experts believe that this is some kind of sabotage from the local governments to disconsider central government in Beijing. Western media believe this is a coincidence of high energy prices on crude, coal and natural gas along with strict central government directions on green economy accompanied by slowing down production.
The situations seem to be complex as with the Chinese developer Evergrande that has missed another payment of $47.5 million on its debt on September 29. Rising energy prices may provoke the Federal Reserve (Fed) for early tapering of its monthly $120 billion bond-buying program, increasing possibility of market plunge.
The Federal Reserve Chairman Jerome Powell is adding fuel to the fire expressing his anxiety or even fear over sustainable inflation that he earlier called transitory. Investors don’t believe Powell now as he literally enshrined transitory regarding inflation. So, when he says the opposite investors consider it as some expansion of transitory inflation but not as confession of the Fed that it is losing control over inflation.
In this regards investors are more convinced of a temporary market correction at the moment and not of the upward trend reversal. Although the upward trend in the stock market seem to be over. Nevertheless, the majority might be right as the S&P 500 index is far above the moving 200-days average that usually used as a trigger for large hedge funds algorithms. This moving average is now at 4145 points. Anyway, this time it is too early to rush.
Technical picture suggests the decline of S&P 500 index towards 4100-4200 points, and only at those levels it would be reasonable to try some buy positions in case of confirmation signals appearance. So far, we may see further decline of the index.
Crude prices are consolidating after surging above $80 per barrel of Brent crude benchmark. Prices may remain within $80 per barrel until Monday when OPEC+ is going to announce its decision over further production increase. Base scenario suggests lifting quotas by another 400,000 barrels per day. However, White House Administration is pressing OPEC to consider substantial increase in production. Last time the U.S. policymakers were so active in crude market was in mid-summer 2021 pushing prices down by 17%. This time something similar may happen and prices may drop to $74-76 per barrel area.
Gold prices are trying to hold on at $1750 per troy ounce. The yield on 10-year U.S. Treasuries dropped a little making the room for gold prices to take a breather. Nevertheless, strengthening Greenback and rising yield on U.S. debt would eventually push gold prices down to $1550-1650 per troy ounce.
The Greenback is celebrating victory over all other currencies. The EURUSD fell to 1.15800 after the recent elections in Germany with the uncertainty over future government and possible loose fiscal policy. However, there is less room for the Dollar to strengthen any further at the moment. So, we may expect a rebound or at least a consolidation at the current level.
GBPUSD is diving deeper reaching the bottom support of 1.34500-1.35500. We may expect a consolidation at this level or rebound by 500-700 points.