Overnight Headlines

*US stocks tumbled with the S&P500 posting its worst month since March 2020

*USD consolidated nears its recent highs

*US 10-year bond yields ended lower again as bonds rallied

US equities fell sharply after starting the day with solid gains. Risk sentiment soured again on worries inflation may persist even after global growth has peaked. The Dow was the laggard, down 1.6% with value stocks joining the selloff. Bond markets are now also seeing lower yields which is more typical of risk-off. Asia has kicked off the new quarter lower too, led by Japan down over 2%. Chinese markets are closed for a week for Golden week celebrations. European futures are tanking with US stock futures signalling a 0.5% retreat.  

USD closed lower on the day and marginally off the one-year high at 94.50. Consolidation after four strong days is to be expected. EUR traded to an intraday low of 1.1563 before closing marginally higher. GBP tried to get back above 1.35 but struggled. The safe haven yen bounced off its lowest since February last year at 112.08 with USD/JPY below 111.50.

Market Thoughts – Equities moment of truth

US stocks made their smallest gains for a quarter since the pandemic last year as investors had to confront the idea that previous market drivers may peter out soon. The S&P500 suffered its first monthly loss since January and its biggest decline since March last year. The punchbowl of billions of dollars of central bank stimulus that helped prop up stock prices is slowly being removed.

Market gains have not been broad-based for a while and the selloff in tech stocks is seeing the FAANG stocks lead indices lower. In contrast to the “reflation” trade at the start of the year, stocks are unable to get comfort from tighter monetary policy due to accelerating growth. Stagflation is increasingly being talked up. A strong NFP number next week may mean an even more aggressive hike path.

Chart of the Day – S&P500’s ugly close

Like many in the market, we have highlighted the 50-day SMA as a decent line of support on the S&P500 over the last year or so. The recent selloff, rebound and subsequent drop in the index looks to have now made this a major level of resistance. Prices failed to get decisively above here around 4445 at the end of last week and we’ve fallen to the 100-day SMA which is now initial resistance at 4345.

The weak close yesterday is worrying with last Monday’s spike low at 4305 acting as near-term support. Targets for the bears are 4356 and 4322. The 200-day SMA sits around 4135.