Apple (NASDAQ:) and Amazon (NASDAQ:) will report their results this evening and we will have more US macro data to look forward to in these last couple of days of the week. With the US presidential election now days away, it looks like stock investors are finally de-risking and turning a bit more cautious now. Thus, the long overdue correction might be underway finally, even if, ultimately, this proves to be just a short-term dip. In any case, extra caution is warranted until at least after the election.
Overnight saw APAC stocks struggle to gain momentum, reacting to a downbeat session in the US as investors absorbed mixed signals from China’s data. The Bank of Japan, in line with expectations, left rates unchanged and held back on any new policy hints, which left markets largely unmoved. Meanwhile, European equities made a negative start, with down by 0.5%, extending Wednesday’s 1.3% decline.
Sentiment turned sour on Wednesday as investors absorbed mixed earnings and macro data. Super Micro Computer (NASDAQ:) plummeted nearly 33% after Ernst & Young, its auditor, resigned and declined to certify the company’s financials. Wednesday’s release of a stronger Q3 Eurozone GDP print (+0.4%) overshot expectations, dampening hopes for a more aggressive ECB rate cut. Luxury stocks added to the weakness, with names like Moncler SpA (LON:), LVMH (OTC:), and Kering (EPA:) declining in Europe.
The focus will now turn back to the US with more earnings and data, and the presidential election to come.
Earnings in focus as volatility rises
Market volatility has edged higher as the climbed to 21.80 today (+7.2%), signaling increased unease amid earnings and ahead of next week’s US election, as well as key economic data releases. Today’s highlights include PCE inflation and jobless claims, while the October nonfarm payrolls report and ISM services PMI will be released on Friday.
US election uncertainty and market impact
The prospect of a Republican sweep in upcoming elections is dominating market conversations this week.
While Trump is seen as a more business-friendly candidate than Kamala Harris, which should, in theory, be positive for US stock markets, it is not as simple as that. For one thing, his proposals for more tariffs could hurt European and Chinese assets, providing a negative scenario for global markets. We have already seen some stress in these markets in recent days, and for the euro and yuan.
For another, investors are now also weighing how Republican control of both Congress and the White House could affect US fiscal policy, and what that could mean for the markets. The concern here is that a Trump clean sweep would bring increased spending and tax cuts. Coupled with his proposed tariff regime, this potential policy shift adds another layer of inflationary pressure, even as US borrowing remains significantly high.
These expectations are already impacting the Treasury market, which is seeing one of its toughest stretches this year. A sell-off in bonds has sent the 10-year yield trending around 4.30%. Bonds are on course toward their first monthly decline since April. While prices have steadied today, the broader trend signals continued pressure on the Treasury market as investors react to the prospect of a more fiscally expansive government.
As yields continue to press higher, investors’ preference for guaranteed fixed nominal returns of around 4.3% or potentially more per annum, might outweigh holding onto growth stocks. This is something to keep an eye on.
S&P 500 technical analysis and trade ideas
As I have highlighted the possibility in my previous posts on the ES, the chart shows a technical breakdown below the trend line of its wedge pattern that had been in place since markets last bottomed in August.
This is a modestly bearish development, which signals that the correction phase might be underway now. At the time of writing, the index was testing the prior support and resistance area around 5805. Failure to hold its own around this area of slightly below could pave the way for a more significant drop to test the July high of 5721 next. What happens there will determine the next directional move for the S&P. A decisive breakback below the July high could pave the way for a potential drop to the next support seen around the 5532 to 5561 area.
Meanwhile, key resistance is now the backside of the broken trend line around the 5865 zone. A daily close back above this level would invalidate the bearish signal that has emerged this week. Above this level is the all-time high at 5927.
Overall, the short-term risks are skewed to the downside, both from a macro point of view, with the election being so close now, and from a technical perspective given the break of the trend support mentioned above.
This does not mean that the long-term bull trend is over by any means, but this week’s price action does serve as a reminder that the markets go down as well as up, underscoring the necessity to always have appropriate risk management strategies in place.
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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.
