Equities report: Bullish tendencies in US stock markets

There seems to be some upward movement on behalf of US stock markets since the start of the week, yet the bullish tendencies for the time being seem to be unconvincing. In today’s report, we are to have a look at the Fed’s stance as included in its latest interest rate decision and Fed Chairman Powell’s testimony before the US Congress, while we are also to have a look at US financial releases that could move equity markets and on a deeper fundamental level, the ceasefire in the Israel-Iran conflict. The report is to be concluded with a technical analysis of S&P 500’s daily chart.   

Fed's wait-and-see stance

The Fed decided to remain on hold in its interest rate decision last week as was expected. Yet the release revealed a deeper hesitation on behalf of the bank to proceed with further easing of its monetary policy. The bank mentioned the solid pace of economic activity expansion, the tightness of the US employment market and that inflation remains somewhat elevated in its accompanying statement. All the comments tend to point towards a delay in any further easing of the bank’s monetary policy yet in the bank’s projections, the new dot plot implies that Fed policymakers’ expectations are for two more rate cuts until the end of the year which seems to be in line with the market’s expectations. In his testimony before the US Congress, Fed Chairman Powell stuck to the script which amplified in our opinion the bank’s hesitation. On the flip side, we have to note that US President Trump and Republicans seem to be adding pressure on the bank to proceed with more easing of its monetary policy. Also at this point, it should be noted that within the Fed the wait-and-see stance may not be as solid as it seems. It’s characteristic that Fed policymakers Bowman and Waller seem ready for an easing of the Fed’s monetary policy, thus blurring the overall picture. Should we see more Fed policymakers in the coming days implying that they favor an earlier rate cut, we may see US equities getting some support as the possibility of an easing of financial conditions in the US economy could be enhanced.   

US may PCE rates could affect US stock markets

Yet despite the Fed Chairman leaning more on the hawkish side in his testimony, US stock markets ended their day in the greens on Tuesday. One reason that may have prompted such a stance on behalf of investors may be in macroeconomics. US consumers seem to be less optimistic about the outlook which may adversely affect retail sales and in turn may add even more pressure on the bank to ease its monetary policy. In the coming days we have a number of financial data that are to be released and could affect US equities. We note among others the release of the final US GDP rate for Q1 tomorrow, the US PCE rates for May on Friday, the ISM manufacturing PMI for June on the 1^st of July and June’s ADP figure on the 2^nd of June. Main point of interest is in the release of May’s PCE rates, given that the PCE rates are the Fed’s favourite inflation measure and we place more emphasis on the core rate. Should we see the PCE rates, implying a persistence of inflationary pressures in the US economy, the market’s expectations for the Fed’s stance to harden may be enhanced thus weighing on US stock markets and vice versa.   

Israel-Iran ceasefire could improve market sentiment

The markets were taken by surprise as US President Trump announced a ceasefire in the Israel-Iran conflict over the weekend, after the US bombed Iranian nuclear sites. The ceasefire seems to be holding, albeit is still quite fragile, as both sides seem to be adhering to US President Trump’s call. We see the case for the ceasefire to be maintained as both sides seem to be in a lose-lose situation should hostilities restart. Should the ceasefire be maintained we may see the market sentiment turning less cautious thus providing support to riskier assets such as equities. As a side note, the NATO summit is ongoing and we note that defence spending is expected to rise to 5% of the member states’ GDP, which in turn may support share prices of defence industry companies both in the US and in Europe, as more orders may pour in.

Technical analysis

US500 daily chart

Support: 5925 (S1), 5745 (S2), 5520 (S3).

Resistance: 6140 (R1), 6400 (R2), 6600 (R3).

S&P 500 edged higher on Monday and Tuesday, yet for the time being, still remains well within the boundaries set by the 5925 (S1) support line and the 6140 (R1) resistance level. Overall we tend to maintain our bias for the sideways motion as was expressed in last week’s report. It’s characteristic that Bollinger Bands remain narrow in a signal of low volatility which, if maintained, may allow the sideways motion to continue. However, the RSI indicator below our chart still currently registers a figure near 60, which tends to imply a bullish market sentiment. For a bullish outlook to emerge we would require a clear break above the 6140 (R1) resistance line, with the next possible target for the bulls being the 6400 (R2) resistance level. On the flip side, for the adoption of a bearish outlook, we would require a clear break below our 5925 (S1) support level, a level which was tested over the past few days and proved its validity, with the next possible target for the bears being the 5745 (S2) support line.