Piece written by Alexa Smith, Trive Financial Market Analyst
It has been a challenging week for equities, with the SPDR S&P 500 ETF (NYSE Arca: SPY) descending to four-month lows. This sharp sell-off was driven by surging bond yields observed on Tuesday, particularly in the 10-year Treasury note yield, which reached a 16-year high. The sentiment took a hawkish turn following remarks from Cleveland Fed President Mester and Atlanta Fed President Bostic, both expressing their support for maintaining higher interest rates for an extended period.
The graph below indicates the inverse relationship between the equity market and US Treasury Yields. As the 5Y and 10Y Treasury Yields climbed, the S&P 500 dropped.
The bond market continued to rally, further exacerbating equity market losses after an unexpected increase of 690000 job openings for August, pushing the total to 9.610 million. This figure surpassed expectations, indicating a stronger labour market than previously anticipated, thus influencing market dynamics.
The market anticipates a 24% probability that the FOMC will raise interest rates by 25 basis points at the next meeting. Additionally, there is a 42% likelihood of a 25 basis point rate hike at the subsequent meeting. Subsequently, the markets anticipate the FOMC’s initiation of rate cuts in the latter half of 2024 in response to an anticipated US economic slowdown.
However, the equity market experienced a moderate uptick as bond yields stabilised. T-note yields retreated after the release of the monthly ADP employment report, which indicated fewer job additions than anticipated, thereby contributing to a more dovish outlook for Federal Reserve policy. Additionally, stronger-than-expected reports on September ISM services and August factory orders had the effect of elevating T-note yields from their lowest levels, placing some downward pressure on stocks. With Non-Farm Payrolls expected tomorrow, will the equity market shy away or begin to reassert its dominance?
Technical
The SPDR S&P 500 ETF faced added selling pressure from hawkish comments from the Federal Reserve, encouraging a breakdown of the ascending channel’s lower boundary. Since the 50-day moving average is converging with the 100-day moving average, the ETF may look to retest the $417.03 support if the channel’s lower boundary propels the price action lower.
However, a boost in buying volume formed a green candle, bolstering the ETF to recover some of its losses. If the Non-Farm Payrolls release exhibits a slowdown, the price action may find itself trading within the ascending channel, with the $433.12 resistance marking a likely point of interest. However, a surge in NFP may see the broader uptrend come to an end.
Summary
The SPDR S&P 500 ETF faced a challenging week, driven by surging bond yields and hawkish comments from Fed officials. If NFP surges, the ETF may attempt to retest the $433.12 resistance. However, the equity market showed a modest uptick as bond yields stabilised due to lower-than-expected job openings, which could pave the way for a drop in NFP and encourage a pullback towards the $417.03 support.
Sources: TradingView, Koyfin
