So, the Fed was as dovish as you would expect, and the stock markets initially rallied before dropping in overnight trading after Jay Powell dashed hopes for a V-shaped recovery. In London, travel stocks got a battering this morning with Carnival down about 9% at the bottom of the FTSE amid concerns over a new wave of infections. Some US states across the west and Deep South have seen a jump in new coronavirus cases after recently loosening their lockdowns. However, cases have continued to fall across Europe and other developed economies where Covid-19 was previously prevalent. With Europe re-opening their economies, so far there hasn’t been any notable jump in new cases but if this changes in the near future then investors may start panicking again.
For now, sentiment remains overall supported thanks to support by major central banks. Lat night, the Fed re-assured investors on its QE programme and indicated interest rates will remain near-zero through to 2022. This should keep the bulls happy for a while yet despite today’s weakness. Indeed, judging by the recent stock market rally, investors feel it is bullish for the markets that the Fed is so pessimistic on the economy that they feel the need to keep monetary policy extremely loose. So, the fact that they probably won’t be hiking interest rates for at least two years, this should further boost those expectations and keep markets supported. That being said, QE and interest rates alone will not be enough to keep stock prices supported in the longer term. While the Fed and other major central banks will provide a tailwind, the global economy needs to recover relatively sharply as lockdown measures slowly easy, otherwise the rally could run out of steam fast.
S&P 500 at key support
Following the FOMC press conference last night, the S&P 500 played out the bearish scenario we had highlighted a few days ago and also as per the Live Market Analysis webinar on Facebook Live. The index held key resistance circa 3215 before breaking below short-term support at 3185 in overnight trading to go on and drop to the level we though it would have bounced at – 3130:
The 3130 was formerly resistance on a couple of occasions, as can be seen on the daily chart above.
Given that the Fed was unambiguously dovish, there is a good chance the S&P will bounce back from this level and if it does then the bulls may initially aim for 3185, the recent support that gave way last night, which is now the first line of defence for the bears. If we then go above this level, then a new high for the month could follow.
Meanwhile, the bears would be hoping to see a clean breakdown of this 3130 level before exerting pressure again, as their short-term objective (3130) is already met.
