The S&P 500 Rally Slows Down, and the Dollar Stops the Demise

Oct 6, 2022
VOT Research Desk

Key News – Insights and Analysis

S&P 500 Disruption-Fundamental Justification The S&P 500’s opening October and fourth quarter rally hit a serious roadblock this past session, breaking the incredible pace of the week.

The temporary seasonal run stalling out, which has brought fundamentals back into focus, increased volatility, and obscured a clear direction are more likely to be the causes of the waver.

There was also a scramble for logic, as is typical for those who have experienced a setback. Although speculation can be its own motivation, We believe the stumble was a natural progression from a market that was not based on traditional fundamentals.

With a modest -0.2 percent decline during the most recent session, the S&P 500 maintained its position as a leading benchmark from the perspective of “risk trends.”That is not a particularly significant loss, but it is a significant disruption in comparison to the previous two-day, 5.7% rally.

On the open, the issue began with a gap to the downside of -1.0 percent. Although this does not appear to be a complete reversal of the upswing that occurred this week, it deprives the market of its capacity to increase speculative momentum and places the onus on legitimate fundamentals. That may present a challenge for emerging bullish interests.

Risk assets have declined through 2022 for a reason: The overall outlook has gotten worse. Although a more concrete backdrop is likely required, it is certainly possible that we resume the bullish swing in the second half of this week. Furthermore, we are unable to establish a solid foundation of enthusiasm

There is a complicated route you could take to justify the decline in scheduled event risk caused by this session’s significant speculative progress dip. The ADP private payrolls figure, the Friday hype man for NFPs, was slightly higher than anticipated. That bolsters the hawkish rate trajectory, with Fed Funds futures pricing in an approximate 70% likelihood of yet another 75bp rate hike at the FOMC meeting in early November.

With a spike in the employment component after the open and the sizable negative gap, the ISM service sector activity report for September was able to above expectations (56.7 vs 56.0 predicted).

That doesn’t completely eliminate the possibility of a recession, but it does appear to delay its onset.

This report, which represents the majority of US economic output, may bolster the notion that the Fed is moving toward rate hikes, but I don’t think the fundamental impact is that significant. For me, the seasonal tides at the end of the quarter and the beginning of the quarter have simply passed. The focus now shifts to tangible fundamental cues, whether bullish or bearish. Looking out over the horizon, there is event risk that tends to follow the more reliable fundamental courses, which I will follow; however, it is also important to monitor the potential “grey swans.” The thread on speculation has now been broken.

The fact that “swans” are either known and regarded as having a very low probability (grey) or extreme impact and completely unexpected (black) is part of their very nature. Over the course of the past week, there was a lot of talk about informal discussions in which Fed members expressed concern about financial stability, which appeared to draw attention to the headlines of Credit Suisse’s position.

With this bank, there were far too many references to the “Lehman moment,” but the oversimplification did not completely misrepresent the general concern.

Over the past few days, credit default swaps (over five years) were still charging higher despite the debunking of a CS crisis. Although few tickers face this intense picture, Credit Suisse is not the only company that takes a premium charge on default risks. We will discuss this banking/financial sector pressure once more next week when quarterly earnings, which typically begin with the banks, begin.

The docket is fairly heavy through more conventional fundamental channels over the next 24 to 48 hours of trade this week.

Notably, after the RBNZ increased its benchmark rate by 50 basis points, as anticipated, this past session, the global monetary policy course appeared to shift in the opposite direction, and the Kiwi Dollar continued to struggle. Even more surprising than its Australian counterpart, which appeared to fail with its own more reserved 25bp hike on Tuesday morning, was that struggle from a typical carry currency.

Even though that forecast is just as exposed, Fed rate forecasting is still pointing to yet another 75bp rate hike in a month. Loretta Mester, Charles Evans, Governor Lisa Cook, Governor Christopher Waller, and Neel Kashkari provide serious Fed official commentary on financial stability in the following section. The implications for growth, inflation, and the tolerance levels of the US central bank are significant. In addition, we have policy insights from the Bank of Japan and the European Central Bank, which are the Fed’s primary competitors.

The Information Depicts ETF components for S&P 500 SPDR (SPY).

% of S&P 500 Stocks Moving Average

5-DAY AVERAGE

88.62%

20-DAY AVERAGE

45.70%

50-DAY AVERAGE

20.95%

100-DAY AVERAGE

29.94%

150-DAY AVERAGE

24.15%

200-DAY AVERAGE

20.95%