The S&P 500 index has dropped by 3.3% to
5,838 points, marking its steepest decline since early September when recession
fears gripped the markets. The Federal Reserve's latest monetary easing
actions, involving a quarter-point interest rate cut to 4.50%, were
overshadowed by hawkish commentary that rattled investors. The Fed raised
inflation forecasts for 2024-2025 and reduced projected interest rate cuts in
2025 from four to two. Fed Chair Jerome Powell reinforced this cautious stance,
emphasizing the need for further evidence of declining inflation and pushing
U.S. 10-year Treasury yields to 4.59%. Market disappointment was widespread,
with S&P 500 futures falling an additional 3.0% and bets on a January rate
cut remaining low at 10.7%.
The index's technical outlook has shifted to a
downside trajectory, targeting 5,600-5,700 points with extreme risks extending
to 5,200-5,300. Current support at 5,820-5,840 may hold temporarily, but next
week could see further declines as support shifts to 5,720-5,740. Overbought
conditions persist, raising the risk of a significant sell-off should
unexpected negative events emerge. The low trading volumes expected during the
upcoming Christmas week further dampen recovery prospects. Historically,
January offers a glimmer of hope, with an average gain of 4.25% since 1927.
While the current correction reduces the likelihood of a rally toward 6,400
points in the coming months, a 4.0-5.0% rebound in early January remains
plausible. However, February and March could prove challenging under the Fed’s
hawkish stance, as these months have historically underperformed.
Investor sentiment reflects caution, with net
inflows into the SPDR S&P 500 ETF Trust (SPY) totaling $2.3 billion this
week, a significant drop from $8.5 billion the previous week. While revisions
could reinforce a "buy-the-dip" narrative if institutional investors
step in, sentiment remains fragile ahead of key economic data. The upcoming PCE
inflation report on Friday is critical, with expectations for headline PCE at
2.5% year-over-year (up from 2.3%) and core PCE at 2.9% year-over-year (up from
2.8%). If the data aligns with these forecasts, it could justify the Fed’s
hawkish tone and limit further downside. A negative surprise, however, could
exacerbate market declines.
From a technical
perspective, the S&P 500’s outlook has reversed. The index surpassed
initial targets at 5700-5800 points and hit the targets at 6050-6150, retreating
to the downside. The benchmark is targeting 5600-5700 points now with the
extreme downside targets at 5200-5300 points. It now sits on the support at
5820-5840 points. It would be hard to dive much deeper below this level today. However,
next week the support will move down to 5720-5740 points making it easier for
the benchmark to continue down.
In commodities, Brent
crude prices are hovering at $72.60 per barrel. The nearest resistance is at
$78.00-80.00, with support at $69.00-71.00. The Organization of Petroleum
Exporting Countries and its allies know as OPEC+ delayed production increase
until April 2025, as expected. Chances for a decline below the support towards
$59.00-62.00 per barrel have risen since then.
Gold prices are at
$2,603 per troy ounce by the end of this week. The nearest resistance is at
$2,670-2,690, while the support is at $2570-2590 per ounce. The upside scenario
for gold prices remains a priority scenario.
In the currency
market, EURUSD has declined following a 1.05% strengthening of the U.S. Dollar
after the Fed meeting. The pair is hovering near late November lows at 1.03900,
with a climb above 1.05700 required to confirm an upside scenario targeting 1.09500-1.10500.
Further downside appears limited unless extraordinary
developments occur.