S&P 500 reverses lower from 3587 highs, erodes daily gains as market digests strong US data

• The S&P 500 has eroded all of its pre-market gains amid choppy post-strong US PMI data trade.
• As markets weigh up whether strong data might deter the Fed from acting, the S&P 500 trades within recent ranges.

US equity markets have been choppy in recent trade, with the S&P 500 initially rallying in wake of the US cash open at 14:30GMT, to then see a further boost to its highest levels since last Wednesday in wake of strong data, only for markets to than change their minds and send the index back towards last week’s lows in the 3550s and back into the red.

S&P 500 buffeted by vaccine optimism, US/China tensions and differing views on strong US data

S&P 500 futures spent the majority of pre-US market trade in the green, boosted primarily by an increasingly optimistic feel regarding the prospect for a global economic recovery in 2021 on the back of further good vaccine news.

AstraZeneca released an update on Monday, announcing that their vaccine has an average efficacy of 70% (a fair bit lower than Pfizer and Moderna’s vaccine), although one regiment of vaccine candidates, those who received a half dose followed by a second full dose one month later, saw average efficacy of 90%.

Importantly, storage conditions are more favourable than Pfizer’s vaccine; this vaccine can be stored at normal refrigerator conditions for at least six months (vs Pfizer’s vaccine, which needs to be stored at -70 degrees Celsius and Moderna’s which can be stored in refridgerator temperature for only one month).

S&P 500 futures took a small knock prior to the cash open on the news that the Trump administration is pushing for new hard-line measures against China to prevent them from employing economic coercion.

According to the Senior officials, they want to create an informal alliance of Western nations to jointly retaliate when China uses its trading power to coerce countries and was motivated by the economic pressure that China has been putting on Australia after the country called for an independent investigation into the origins of the Covid-19 pandemic.

However, S&P 500 futures managed to hold onto reasonable gains on the day heading into the not normally widely followed Markit PMI release at 14:45GMT.

Monday’s US Markit PMI release was different, however, triggering a very large market reaction, particularly in FX markets; given how strong the data itself was, as well as the fact that it showed US inflation starting to shoot up in November, USD has seen a stunning rally, with the Dollar Index jumping from around 92.00 to above 92.50.

Over the same period of time, the S&P 500 has swung between initial post-data gains (given the strong data boosting optimism about future earnings) to trading back to flat on the day.

Given the reaction in USD, it seems as though markets are taking the view that strong data and the prospect of higher than previously anticipated inflation heading into 2021 might set the scene for a less accommodative than hoped for Federal Reserve, something which is being taken as a negative stock market valuation.

S&P 500 continues to trade within recent intra-day ranges

The S&P 500 continues to trade within a roughly 3543-3583 range. Should the bears prevail and send the index below last Thursday and Friday’s lows around 3543, the door would be opened for a retest of the 3510-3520 area, which acted as significant support/resistance from the 5 to 11 November. Conversely, should the bull prevail and push the S&P 500 higher, resistance at the psychological 3600 mark would be important, as would the beginning of last week's highs around 3620-3630.

S&P 500 futures four-hour chart