Pullback in equity sets to extend as dollar gains | CMC Markets Daily Commentary
US equities fell for a second day and the dollar moved higher as markets continue to unwind a deep interest rate cut expectation following last Friday’s strong non-farm payroll report. Focus will fall on Powell’s congressional testimony this Wednesday, in which investors seek for further clarification of the Fed’s policy route.
At present, the probability of a Fed interest rate cut in the futures market is still at 100%, including a 98% probability of a 25 basis point rate cut and a 2% probability of a 50 basis point rate cut.
There seems to be a lack of strong reasons for an immediate interest rate cut – US stock markets have hit record highs, unemployment rate is at a 4-decade low, wage growth at 3.2% and economic growth has remained above 3.0%. An interest rate cut in such sound economic conditions without immediate systemic risk in the horizon is unprecedented.
It will also lead to criticism that central banks have gradually lost their policy independence; catering to market and political demands and deliberately adopting loose monetary policy. People might worry that when the real economic crisis comes, the Fed would have already used up its ‘gun powder’ and will be left with little to no room for further interest rate cuts to stimulate the economy.
The biggest risk in the market now is perhaps that current asset prices completely and even excessively reflect the expectation of several interest rate cuts at the end of the year, while underestimating the risk of continued decline in the manufacturing sector and a potential re-escalation in trade conflicts.
Technically, the S&P 500 index has likely formed a ‘butterfly pattern’, suggesting there could be more pullback from the recent peak of 3,000 points. Its trend remains bullish, with 10-Day SMA and SuperTrend (10,3) both sloped upwards. Once these two indicators turn downward, it will confirm a trend-reversal.
EUR/USD is trending lower to 1.121 area this morning. Immediate support level can be found at 1.118 and resistance can be found at 1.126 area.
US SPX 500 – Cash
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