- Markets are bouncing back as investors bet on technical support, tariff relief, and Germany’s stimulus plans.
- But with ISM and NFP data ahead, Fed rate cut bets could shift, bringing more volatility.
- The S&P 500 now faces a key test—will it hold support or signal more downside?
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US index futures were trading higher by mid-morning European session, tracking a firmer tone in Europe, where the major indices like the German DAX approached their all-time highs. Sentiment has been supported in part because of plans by German Chancellor-in-waiting Friedrich Merz to amend the country’s constitution to exempt defence and security outlays from fiscal spending limits.
This will pave the way for a €500 billion infrastructure fund to invest in transportation, energy grids, and housing over 10 years. Also helping sentiment was speculation US trade tariffs may be dialled down because of the stock market drop. US Commerce Secretary Howard Lutnick hinted at a compromise on tariffs on Tuesday, while Trump himself acknowledged that there may be an “adjustment period” to tariffs. The key question now is whether the recovery will hold?
Trade War Fears Saw the S&P Wipe Out Its Post-Election Rally
The rebound comes after the global markets took a beating across the board yesterday. Sentiment turned sour as mounting fears over the economic fallout from an escalating trade war drove investors towards short-term bonds, gold, and haven currencies like the yen. Stocks, crude oil, risk-sensitive currencies like the Australian dollar, as well as cryptos and crude oil, all took a hit. Notably, the S&P 500 index wiped out its entire multi-trillion-dollar post-election rally. But late in the day, we saw a recovery attempt that proved to be short-lived, followed by another that ensured major indices would close well off their lows.
Why Have Markets Fallen?
Well, I think tariffs has a lot to do with it, but other reasons such as valuation concerns and profit-taking are certainly among the factors behind this sell-off. But the selling pressure has certainly accelerated in the wake of the US imposing its most sweeping set of tariffs in recent memory. Trump has targeted a broad range of imports from China, Canada, and Mexico—prompting swift retaliatory measures. But is the selling done for now?
Focus Turns To Key US Data: ISM and NFP
Soft data and now trade tensions have stoked concerns over global growth. Consequently, traders are now fully pricing in three quarter-point rate cuts by the Fed this year. This week’s incoming data could see rates traders re-price Fed rate cuts again.
Recently, we have seen incoming US data show signs of weakness. Consumer confidence indicators have missed forecasts, while the housing market has also exhibited signs of strain. The S&P Global flash services PMI, often a precursor to the ISM PMI, slipped into contraction territory as we found out last week.
Today, investors will be watching closely to see if the ISM PMI follows suit, as a weaker-than-expected reading could fuel further rate cut speculation. Economists expect a reading of 52.5 from 52.8 previously.
The focus will then turn to the monthly jobs report on Friday. January’s US non-farm payrolls report caught markets off guard with a robust wage growth figure, as average hourly earnings jumped by 0.5% month-on-month. This surge in wages was enough to dent expectations of imminent rate cuts, even as the headline jobs figure fell short—an outcome offset by significant upward revisions to previous data.
Recent data releases have generally been on the softer side, but the Federal Reserve remains wary of inflationary risks. Long-term inflation expectations have been creeping higher amid trade war fears, stoking anxieties about stagflation. But if the trend of softer data continues, then rate-cut bets will rise further, which could provide a cushion for the markets coming under pressure because of the ongoing trade war.
Markets Bounce Off Key Technical Levels
Yesterday’s rebound started as the likes of the Nasdaq 100 and S&P 500 tested liquidity below their technically important 200-day moving averages, while individual stocks like MicroStrategy (NASDAQ:MSTR) and Oracle (NYSE:ORCL) also bounced off their own 200 MAs.
Others such as Nvidia (NASDAQ:NVDA) stock found support from the key support around $110 while Tesla (NASDAQ:TSLA) held $265, and Alphabet (NASDAQ:GOOGL) bounced off trend support at $170. Therefore, the recovery was at least partially driven by technical buying. It is all about whether we will now see some upside follow-through today. If we do, then that would be a positive sign as we head towards the business end of the week, else more volatility can be expected in the near-term outlook.
S&P 500 Key Technical Levels and Factors to Watch
As far as the S&P 500 is concerned, well it tested a major support area yesterday – and bounced. As per the daily futures chart of the S&P, the area between 5721 to 5776 is where the last election-related rally started. It is where the Trump rally commenced. What’s more, the technically-important 200-day moving average also comes into play here.
So, whether the index will continue to be able to hold here or not will have major implications for the days ahead. With the daily RSI now near 30, the index is starting to look a little oversold in the short-term outlook and therefore in dip-buying territory for the bulls.
Yesterday’s recovery stalled near the first key area of resistance of around 5850. Slightly above here, the backside of the broken trend line that had been in place since October 2023 comes in at around 5885. Therefore, if the index goes on to break and hold above this 5850-5885 area, then that would mark a key bullish reversal, which could lead to a nice recovery in the days ahead.
Alternatively, if the selling continues and we break below the aforementioned 5721 to 5776 area, then in that case this could turn out to be a more significant correction, the sort we haven’t had over the last couple of years.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.