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S&P Slips From Highs

It’s fair to say that it’s been a relatively quiet week across markets. We’ve seen decent volatility, just little in the way of clear directional moves. Much of what has gone up, subsequently came down and vice versa. Weeks like this, however, are a good time to reflect on one’s trading and plan ahead as the big moves and key catalysts are never far away. Still, there has been plenty happening this week, and chatting with traders ahead of the weekend it seems the big move capturing the most attention is the almost 3% pullback in the S&P. So, let’s take a look at what caused the move and, as ever, if you caught it? Well done! If you missed it? There’s always next week!
 

What Caused the Move?

Shifting USD View on Better US Data

The main driver behind the drop in the S&P this week has been the change in the USD outlook on the back of recent US data and Fed commentary. Last week’s December US labor market data showed the NFP coming in almost 3x higher than forecasts while the unemployment rate was seen falling back to levels last seen in 1969. On the back of this surprisingly strong data traders feared the Fed might look to press ahead with rate hikes for longer than originally expected given that the anticipated downside impact on the economy has clearly not been as harsh as thought.
 

Hawkish Fed Comments

With USD rallying firmly across the board, US markets came off rather sharply. This week, then, the focus shifted to a slew of Fed commentary over the week, kicking off with chairman Powell on Tuesday. While Powell’s speech was more or less a repetition of his comments at the FOMC it was subsequent comments from other Fed members that caused concern for equities traders. Fed’s Williams and Kashkari both called on the Fed to continue with hiking throughout this year with Williams saying that rates would need to stay at higher levels for years, beyond the Fed’s current projections, and Kashkari calling for rates to peak around 5.4% at least, above the Fed’s own projections again.
 

Downside Risks for S&P

These comments represented a clear hawkish uptick on the back of last week’s data and raised fears that other Fed members might be feeling the same way, putting larger hikes (or hiking for longer) back on the table. Looking ahead then, the outlook for the S&P will be very tied to incoming US data and Fed commentary as traders look to gauge how the Fed is likely to proceed this year. Further strong data might therefore weigh on S&P, boosting hawkish Fed expectations.
 

Technical Views

S&P

(Click on image to enlarge)

The rally off last year’s lows has seen the index testing above the 4153.50 level though the move has stalled for now and since reversed back under the level. With momentum studies weakening, while below here, there are risks of a deeper move back toward the bull channel lows and 3910 below. Back above, the focus shifts to the 4305 level next.

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