SP500 Elliott Wave Analysis: Next market rally depends on this
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10/06/21 10:53
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Markets cheer as US avoids default, but liquidity, sovereign debt downgrade, and rising interest rates loom large. Source: Bloomberg Debt United States United States debt ceiling Government debt Market liquidity Default Tony Sycamore | Market Analyst, Australia | Publication date: Monday 29 May 2023 US averts default, sparks market relief In a collective sigh of relief, regional equity markets and US stock futures are basking in the news of a tentative deal clinched by US President Joe Biden and House Speaker Kevin McCarthy. This critical agreement, designed to raise the debt ceiling, averts a potentially catastrophic default. As the prospect of financial Armageddon loomed, default was never truly on the table. However, the danger that negotiations might overshoot the theoretical X-date was palpable. Such a scenario would've compelled the US Treasury to juggle a medley of special measures, concessions, and preferential payments, in a replay of the mid-'90s, where financial and political destruction was rife. The ball is now in Congress's court, as we anticipate the legislation's passage within the week. Fitch's warning shot: US sovereign debt under scrutiny Last week's announcement by Fitch to put the United States Sovereign Debt on credit watch negative may have been the catalyst to hasten the debt deal. Unfortunately, the terms of the deal that allow the debt ceiling to remain uncapped for two years will do little to ease Fitch's angst and may still result in a costly downgrade. "The failure of the US authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden." Another side effect of leaving a deal to the eleventh hour is that the cash balance in Treasury's account used for daily payments has fallen to less than US$50 billion and needs rebuilding. To do this Treasury is expected to issue US$1 trillion of bills over the next two months, draining liquidity from the system. Rate hike on the horizon: Market anticipates tighter monetary policy In isolation, a liquidity drain would be more manageable if not for the hotter-than-expected Core PCE Price Index print on Friday night (4.7% in April vs 4.6% exp). Fuelled also by hawkish overtones from numerous Fed speakers, the rates market is now assigning a 65% chance of a 25bp rate hike for the upcoming June FOMC meeting. The 100bp rate cuts priced into the US rates market by year-end after the banking crisis has narrowed to just 35bp. While the weekend's debt deal has enabled markets to breathe a sigh of relief, the market will likely soon focus on the impact of tighter liquidity, a sovereign debt downgrade, and higher interest rates. S&P 500 technical analysis Holding a high-conviction technical view has been impossible while debt ceiling negotiations played out. Now they are in the rear vision mirror, presuming the S&P 500 can hold above range highs 4210/4185 (closing basis), allow for the S&P 500 to rally initially towards the August 4327.50 high. Aware that a daily close below 4185 would warn the break higher has failed and likely see another round of choppy range trading unfold, with scope back to 4060ish. S&P 500 daily chart Source: TradingView Nasdaq technical analysis Post the Nvidia earnings report at the end of last week and this morning's debt deal rally, the Nasdaq is officially well and truly into overbought territory. However, as viewed during the dot com bubble in the late '90s and many others since, when animal spirits take hold, rallies can extend a lot further than expected. Dips will likely be shallow and well-met by buyers eager to participate in the current AI euphoria. Nasdaq daily chart Source: TradingView Dow Jones technical analysis The saying goes that a rising tide lifts all boats. However, the Dow Jones really needs to break above the recent 34,257 high and the 34,342 year-to-date high to re-energise its upside prospects. In this case, we would expect to see a test of the 34,712 high from December 2022 with scope to the 35,492 high from April 2022. Dow Jones daily chart Source: TradingView ASX 200 technical analysis Like its old economy counterpart in the US, the Dow Jones, the ASX 200 has languished in recent weeks due to a lack of heavyweight IT stocks within the index. That said, the debt ceiling deal has provided a lift for the ASX 200 this morning, with all sectors in positive territory apart from Consumer Discretionary. If the ASX 200 can break above downtrend resistance at 7300, coming from the February 7567 high, it would likely see the ASX 200 extend gains towards 7390/7400 in the short term. ASX 200 daily chart Source: TradingView TradingView: the figures stated are as of May 29, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation. -
The gold price has succumbed to US dollar strength of late with the Fed in focus and Treasury yields and real yields continue to elevate and might add to dollar demand. Source: Bloomberg Forex Commodities Gold United States dollar United States Futures contract Daniel McCarthy | Strategist, | Publication date: Monday 29 May 2023 The gold price slid to a two-month low to start the week as concerns around the US debt ceiling appear to be subsiding at the same time that US yields are ticking higher. Treasury yields have been steadily climbing throughout the last few weeks across the curve, but the most notable changes have been seen at the short end of the curve. The benchmark 2-year bond made a run above 4.60% on Friday after having dipped to 3.66% earlier this month. The 1-year note also made a 23-year high on Friday when it nudged 5.30%. It touched 4.03% in early March and the higher rate of return reflects the markets’ perception that the Federal Reserve is less likely to be cutting rates this year. Interest rate swaps and futures markets have kicked that concept into 2024. The higher return from US dollar denominated debt seems to have broadly supported the ‘big dollar’. It is making multi-month peaks against many currencies and the commodity complex is generally lower but silver managed to notch up a decent rally on Friday. Although it still finished down for last week and it is steady to start this week near US$ 23.30 an ounce. Undermining the yellow metal is the rise in US real yields. The real yield is the nominal yield less the market-priced inflation rate derived from Treasury inflation-protected securities (TIPS) for the same tenor. The widely watched US 10-year real yield is approaching 1.60%, a level not seen since the regional banking crisis unfolded back in March. When the inflation-adjusted return is rising, investors are left to ponder the outlook for non-interest-bearing commodities such as gold. The US dollar has been on a steady run higher of late and the direction in the DXY (USD) Index might lead the precious metal on its next move. At the same time, gold volatility has been slipping and this may indicate that the market is at ease with the current pricing. GC1 (gold futures), US 10-year real yield, DXY (USD) index, GVZ (gold volatility) Source: TradingView GC1 (gold front futures contract) technical analysis Gold remains in an ascending trend channel that began in November last year but is currently testing the lower bound of that channel. The early May high of 2085.4 eclipsed the March 2022 peak of 2078.8 but was unable to overcome the all-time high of 2089.2. This failure to break new ground to the upside has created a Triple Top which is an extension of a Double Top formation. This has set up a potential resistance zone in the 20280 – 2090 area but a snap above those levels may indicate evolving bullishness. The next level of resistance could be at the upper ascending trend channel line that is currently near 2160. On the downside, the price is at an interesting juncture with the ascending trend line being questioned. At the same time, there are two prior lows near that trend line as well as the 100-day Simple Moving Average (SMA). A clean break below 1930 might see a bearish run unfold but if these levels hold, it may suggest that the overall bull run could continue. In this regard, the price action in the next few sessions might provide clues for medium-term direction. Gold futures daily chart Source: TradingView This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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Crude oil is holding above tough support, keeping alive the capitulation view; natural gas has fallen sharply, but the downside could be cushioned and what are the key levels to watch? Source: Bloomberg Commodities Petroleum Natural gas Gas OPEC United States Manish Jaradi | IG Analyst, Singapore | Publication date: Monday 29 May 2023 Crude oil: Boxed in a range Crude oil recouped some of last week’s losses as investors cheered a weekend deal in Washington to raise the government’s debt ceiling, potentially averting a disruptive government default. Oil has managed to hold recover despite Russia’s Deputy Prime Minister Alexander Novak’s comments late last week that OPEC+ wasn’t likely to take further measures to change production levels at its meeting on June 4. This followed Saudi Energy Minister Price Abdulaziz bin Salman warning that speculators should ‘watch out’ for pain – a sign that the group was preparing to cut output. Crude oil monthly chart Source: TradingView Still, the upside in oil could be capped as the US Federal Reserve is expected to hike interest rates further at its June meeting and demand concerns given the uneven post-Covid recovery in China. The market is pricing in a 60% chance of a 25-basis-point Fed rate hike on June 14 Vs a 17% chance a week ago and see no rate cuts until the end of the year. Crude oil daily chart Source: TradingView On technical charts, crude oil’s hold above 64.00 could be a sign that oil may have capitulated following a multi-month decline. However, there are no signs of a reversal of the downtrend yet. In this regard, oil would need to break above the April high of 83.50 for the downward pressure to fade. Until then, the path of least resistance is sideways to down. Natural gas: Down but not out Natural gas prices dropped sharply on Friday, before recovering slightly on Monday morning in Asia, weighed by milder US weather and a rebound in Canadian natural gas exports to the US. Natural gas daily chart Source: TradingView Reports suggest the weather in the Lower 48 states would switch from cooler than normal From May 26-29 to mostly near normal from May 30 - June 10. Furthermore, earlier this month, wildfires forced Canadian producers to cut natural gas exports to the US. However, last week, exports appear to be recovering to levels seen before the wildfires. Still, the downside in natural gas prices could be limited by declining drilling activity on oversupply conditions and tighter credit conditions. On technical charts, so long as natural gas stays above the February low of 1.97, some more upside can be expected, potentially toward the March high of 3.03. Natural gas monthly chart Source: TradingView This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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