Equities Underwater

It’s been something of a blockbuster week in markets with plenty of big moves across the board. As usual then, this means that some traders will be congratulating themselves, some will be commiserating, and some will be cursing themselves for missing the train altogether. Now, while there have been moves aplenty this week, it seems the main market story most traders are focusing on is the more than 5% drop in the S&P 500. So, let’s take a look at what caused this and, as ever, if you caught the move? Well done! If not? There’s always next week!

What Caused the Move?

Fed Tightening In Focus

The slide in US equities this week has been a function of the broader retreat in risk appetite. Now, in terms of specific drivers, it’s a little tricky to pin this move down given that the US Dollar, while a little higher this week, has certainly not broken out. Additionally, US treasuries have been lower also. However, it’s worth remembering that the macro backdrop currently is very much fixed on Fed tightening expectations and the current ramp in inflation.

While USD upside positioning has been elevated recently, creating a higher barrier to further rallies there, these Fed expectations are now starting to play out in other areas of the markets. So, given that large rally we saw in the S&P across last year, its clear now that we are starting to see profit taking and position covering ahead of the FOMC meeting next week. While the Fed is not expected to move on rates next week, the market is firmly expecting the Fed to deliver a hawkish statement, potentially signalling its intentions to lift rates as early as March.

Geopolitical Risks

Alongside these Fed tightening expectations, we also have some slightly darker market inputs to monitor. The situation between Ukraine and Russia is becoming increasingly tense and with the US warning that a Russian invasion of Ukraine might be imminent, there is certainly a lot of fear in the market, translating into the exodus from risk assets we’ve seen this week. So, in terms of the outlook then, it seems that if the Fed delivers with a hawkish statement next week, the S&P looks vulnerable to further losses near term. However, the Fed’s latest outlook will need to represent an upgrade on the prior message in order to keep equities weighed, given how much is already priced into the view at this point.

Technical Views

S&P 500

The break down below the rising channel has seen the market falling to a test of the 4475.25 level. While this region is holding as support for now, both MACD and RSI have turned heavily lower here, putting the focus on a further breakdown towards the 4295.75 level next. To the topside, bulls will need to see price reclaim the 4744 level to alleviate near term bearishness.