S&P 500 Index needs further fiscal support to avoid a correction

S&P 500 is treading water at a fresh six week low and is headed to official correction territory as attention is returning to fiscal assistance given a loss of momentum in the economic data and the surge in COVID-19, FXStreet’s Ross J. Burland reports.

Key quotes

“With researchers around the world racing to develop a vaccine, the optimism has dimmed and investors have been spooked by the spike in new coronavirus cases in several European countries. This has encouraged some profit-taking, adjustments and rotation between sectors, or a rebalancing act between the biggest weights in the market to the smallest weights.”

“Attention returns to the prospects of more fiscal assistance given a loss of momentum in the economic data. The problem lies with Senate Republicans. The equity rally and President Trump’s executive orders have bought them time but the question is whether it will take a steeper stock market correction or acceleration in unemployment to spark action. The froth of the markets has been swiped off partly due to the highly anticipated Federal Reserve meeting that eventualised into a slightly less dovish than hoped for outcome.”

“What the stock markets want to see is an enactment of the sort of package that President Trump or Speaker Pelosi have both endorsed, although Washington’s deadlock means hopes are waning for cash-strapped states. As such, this is undermining growth prospects in the last quarter for 2020.”

“The focus for the week will be on a flurry of Fed speakers, starting with Chair Powell testifying to a congressional subcommittee on the central bank’s response to the pandemic. Mester and Rosengren will also be speaking at virtual events. However, as far as details on the new average inflation target go, it appears that the US stock market will have to be satisfied with the vague wording we got in the September meeting.”

“The S&P 500 is already crossing below its uptrend and it is now close to a 10% decline from the peak. A 10% fall is commonly viewed by market technicians as an official correction. The structure to watch for is the 61.8% Fibonacci around 3200 to the downside.”