Yesterday was quite a stressful session for stock traders as we saw an aggressive selloff at the beginning of the session, which, then softened, brought back the ‘dip-buyers’.
Warnings that the Q4 sales may have not been as strong as expected from some retailers like Lululemon dampened the mood, which was already well fragilized by the hawkish Fed expectations after the US jobs figures supported the idea that the Federal Reserve (Fed) could and should move fast to rectify its relaxed behaviour against inflation last year. Lululemon Athletica which was one of the first retailers to reveal the holiday season performance said its fourth-quarter sales and earnings would be toward the low end of its expectations- Holiday season apparently kicked off on a strong footage for Lululemon, but then staffing shortages and shorter operating hours seemingly hit the holiday season performance.
And the staffing shortages has become a real issue for businesses. It is said that 2-3% of the US labour force is calling in sick due to omicron related issues nowadays. Europe is dealing with similar absences and the situation is alarming, the economic activity is slowing, but the tighter central bank expectations remain in place due to a rising inflation. It’s a bad cocktail.
Nasdaq dived more than 2.5% yesterday, but bounced higher to close the session 0.05% up. Yesterday’s rebound was bigger than any rebound we observed since the bottom of the pandemic bear market. Yet, the index tipped a toe below its long-term bullish channel base and the major catalyzer of the move, the hawkish Fed expectations, hasn’t changed. This means that the downside risks prevail in stock markets, and growth stocks remain on the chopping block, as they are the most sensitive to interest rate changes.
Meanwhile the prospects of higher interest rates are strengthening, many call for four Fed rate hikes in 2022 instead of three, and the US 2-year yield continues pushing higher; it’s probably just a matter of time before we step above the 1% mark.
The question is, does the Fed have any interest in wreaking havoc in the financial markets just to fight back inflation? The answer is no. This is why the whole thing is data-dependent and given how hawkish the market shifted recently, there is a chance we see a certain softening in hawks’ positioning, which could lead to a certain positive correction to the latest equity selloff.
And the actual index levels start looking interesting for dip buyers, as Nasdaq slipped below its bullish trend base and approached the important 15’000 psychological support, while the S&P500 came very close to its up-trending channel base and the 100-dma, near 4560/4580 band. And if there is a rebound, the actual levels look good for, at least, a minor positive correction.
But – and there is always a but – the appetite is of course dependent on tomorrow’s inflation read in the US. The US inflation may print a figure at or above the 7% mark tomorrow. A softer figure will likely give hope that the positive pressure may be coming to an end and give a sigh of relief to investors, but in all cases the actual levels remain very high for a country like the US which targets a 2% average inflation. And it also shows that insisting on the fact that inflation is transitory was a mistake.
The latter is true for Europe as well. The German 10-year bund yield is now preparing to step above zero for the first time in three years, as investors are increasingly betting that the European Central Bank (ECB) should also declare war against inflation. In this respect, the EURUSD could soon clear the 50-dma offers.
