Why Are Equities Indices Reversing?

Trading Tips

US Equities Concede Gains

Headlines and sentiment over the last month have been increasingly positive with and more optimism being attached to the tentative recovery underway in the US. However, if the recent stock market rally felt a little too good to be true, then price action over the last couple of days will have been welcomed gladly by bears. The S&P dropped 7.44% from midweek, post lockdown, highs with Wednesday marking the largest one-day loss since lockdown began. This type of decline has been seen across the US indices with the Dow registering a 9% retracement from post-lockdown highs. With selling pressure continuing, investors are wondering whether this is just a correction within the recent rally, or the potential resumption of the bearishness seen earlier in the year?

‘Second Wave’ Fears Emerge

One of the key causes of the downturn this week was the fresh focus being placed on the covid-19 outbreak in the US. With the rise in the death toll having slowed over recent weeks and with many local economies beginning to reopen, there has been a great deal of optimism that the virus has now passed and the US will simply make a gradual, liner recovery.

However, reports this week highlighted the re-emergence of covid-19 cases in some states in the US such as Florida, Texas and California noting steady increases in infection rates since the lockdowns eased. Florida this week reported its highest weekly infection rate since the crisis began, with 8553 new cases while Texas reported its largest one-day spike of 2504 new cases. Health authorities are watching the situation with great concern, fuelling speculation that lockdowns might need to be reintroduced if the death toll starts to increase at a faster rate.

Despite the reports of fresh infection increases this week, Treasury Secretary Steve Mnuchin appeared to rule out the possibility of a further country-wide lockdown. Speaking with CNBC, Mnuchin said “We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage.”

Fed Fires Warning Shot

Amidst rising concerns over a potential second wave of the virus, the June FOMC saw the Fed delivering a sobering message of concern. Fed’s Powell warned the market that the damage to the US economy will not be easily or quickly repaired and the downside impact from the virus will be felt for years to come. While Powell acknowledged the bumper May jobs number, which saw 2.5 million jobs recovered, Powell warned that the labour market remains in disarray and unemployment is likely to stay elevated for years to come with the Fed not even “thinking about thinking about raising rates” which it now projects will not be tightened until at least 2022. The message came as a blunt strike of reality for those getting carried away on the back of the NFP report last week and, with the Fed forecasting the US economy to contract by 6.5% this year, suggests further stock market downside come be coming.

Downside Risks

With racial-equality protests still unfolding across the US and with tensions between the US and China still simmering away just below the surface, there are plenty of downside risks for the US economy. If the recent upward trend in infection rates continues, the debate around a second lockdown will certainly start to gain more traction and equities markets will be exposed to further weakness.

Technical Views

S&P500 (Bullish above 2970)

From a technical viewpoint. The S&P has bow broken below the rising trendline from year-to-date lows but is still sitting atop the yearly pivot at 2970 for now. While this support zone remains intact, focus is on further upside in the near term. However, a break below this level will open the risk of a deeper move down to 2884.50 and the yearly s1 at 2694.

Why Are Equities Indices Reversing?

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

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