S&P 500 slides under 4550, eyes recent 4500ish lows with Omicron & fiscal stimulus pessimism in focus

US equities are lower across the board on the first trading day of the new week. The S&P 500, Nasdaq 100 and Dow all down more than 1.0% on the session, amid concerns about the rapid spread of the Omicron variant in Europe, a significant setback to US President Joe Biden’s economic agenda and a hawkish Fed. The S&P 500 gapped below the 4600 level on Monday and has since dropped all the way below the 4550 mark where it trades lower on the day by about 1.8%.

Equity bears will be eyeing a test of monthly lows in the 4500 area if things continue as is. The next major support below that would be the October lows all the way down under 4300, another nearly 6.0% below current levels. A drop back to these lows would mark a near-10% pullback from the November record intra-day highs close to 4750. A pullback from highs of over 10% in US equities is seen as a “correction”.

Looking at the other major indices; the Nasdaq 100 gapped below 15.6K at the open and is now flirting with monthly lows in the mid-15.5K area, where it trades about 1.6% lower on the day. The Dow, meanwhile, has slumped all the way towards the 34.7K area from opening levels closer to 35.25K, where it trades lower by about 1.9% on the session. Amid the surge in selling, the S&P 500 CBOE Volatility Index (often referred to as the VIX) spiked back above 25.00, up more than 4.0 points on the day and at two-week highs.

Driving the day

On of the key drivers of risk-off on Monday has been an escalation of the Covid-19 situation in Europe. In a surprise move, the Netherlands on Sunday announced a full lockdown. As speculation swirls elsewhere on the continent, other countries are expected to follow suit straight after Christmas (as cancelling people’s Christmas plans is politically untenable in many countries). The UK is rumoured to be planning a lockdown from 27 December.

US markets are clearly worried that the US is headed in the same direction as Europe when it comes to the pandemic and is just a few weeks behind. According to analysts at Independent Advisor Alliance, "typically what happens in Europe is a bit of a preview for what we see in the United States. So, if we see a lot more infections in the U.S., it could stress hospitals, make people less reluctant to get out, spend, and partake in the economy. That's definitely a cause of concern."

Sentiment in the US was dealt a further blow by news over the weekend that moderate Democrat Senator Joe Manchin would oppose the Biden administration’s $1.75T Build Back Better (BBB) social spending package, the flagship policy of his economic agenda. There is speculation that negotiations on a further stripped-down version of BBB will continue in the new year, with some interpreting Manchin’s “no” as a negotiating tactic. But it has nonetheless dented confidence in US growth prospects, reflected in Monday’s underperformance of the S&P 500 GICS materials, financials, energy and industrials sectors, each of which are lower by more than 2.0% on the day.

Another factor being cited as weighing on sentiment is the hawkish signals sent from the Fed in recent days. Recall last week that the Fed doubled the pace of its QE taper, which Fed member Christopher Waller said on Friday indicated that the March meeting was live for a rate hike. The Fed’s new dot plot pointed to three rate hikes in 2022, so support for a March lift-off is unlikely to be far from the bank’s consensus view.

Some traders expressed hope on Monday that if Omicron gets really bad in the US and more Congress fails to pass further fiscal stimulus, the Fed might delay their tapering plans. But the Fed seems very much focused on combatting elevated inflation now that the labour market has made good recovery. If Omicron causes further inflationary pressures, this would likely make the Fed more hawkish rather than anything else.