Happy ending to yesterday’s bloodbath was highly unlikely but it happened. The S&P500 and Nasdaq closed Monday’s session in the positive after having dived more than 4% within the session.
Nasdaq extended losses below its 200-DMA, while the S&P500 briefly entered the correction territory, as the index lost more than 10% from the latest record high.
Yesterday’s rebound raised one important question: is it the end of the selloff wave?
It depends on two major factors:
- How aggressive the Federal Reserve (Fed) will fight back inflation and what it’s ready to risk in terms of market pricing.
- Who will survive to the tighter rate environment.
Obviously, there is a slim chance we see meme stocks, SPAC deals, or highly speculative names doing well in an environment of tighter Fed liquidity. There is, on the other hand, a better chance for companies like Apple and Microsoft to navigate through a high turbulence market.
So the Fed tightening will certainly support the reflation trade, but it will more importantly trigger a flight to quality.
Fed can’t sound too sanguine
The Fed starts its two-day policy meeting today. But after the January selloff, the Fed is not in a position to provoke the hawks.
Fed’s goal is to fight back the inflation crisis, and not to trigger a renewed financial crisis. And the Fed can’t afford to trigger a financial crisis when inflation is so high.
As such, the recent market turmoil will certainly soften the Fed’s tone, or at least prevent the Fed from sounding too hawkish. The Fed will still continue tapering the bond purchases, it will likely proceed with the first rate hike in March and follow up with three other rate hikes throughout the year. But the officials may sound be more gentle on the balance sheet reduction strategy, and more.
Beyond the Fed
And the market is challenging beyond the Fed tightening. Besides the growing tensions at the Ukrainian border, Biden’s Build Back Better package is stuck among the politicians who can’t agree what to do with it right now, the measures that have been taken to decrease the trade deficit with China didn’t work well, and there is news that the White House is increasingly under pressure to punish Chinese for their lack of commitment. But punishing Chinese by blocking or taxing the cheap Chinese goods from coming into the US is not very efficient in fighting back inflation at a time consumer prices hover around four-decade high levels.
In the FX, commodities
The US dollar is a generally a good place to go when you have a war threat, or a heavy selloff in markets. The US dollar index is gaining back the 50-DMA level.
Gold comes certainly back to the safe-havener’s scope, yet the investors should get over the rising US yields to push the yellow metal above its long-term downtrending triangle top, which lies about the $1860 mark.
And well, the Swiss franc is boosted by important safe-haven inflows- The EURCHF slid to the lowest levels since 2015. But I wouldn’t bet too much on a further downside as the stronger the franc, the bigger the chance of an SNB intervention which would slowdown the move, and even reverse it.
