Swissquote: Decoupling S&P 500

Swissquote: Decoupling S&P 500


Last Friday’s inflation revisions in the US were insignificant and hinted that inflation in the US was about the same by the end of last year. Consumer prices rose 3.3% in the final 3 months of the year in the US – the latter was good news for everyone craving to see the Federal Reserve (Fed) eventually start cutting interest rates sometime in the H1 of this year.

But alas, the US 2-year yield – which best reacts to the rate expectations – rose on Friday and is gently drilling above the October-to-now descending channel’s top, and the 10-year yield is back flirting with the 4.20% level despite strong bond auctions of last week in the US. Activity on Fed funds futures gives less than a 20% chance for the first rate cut in March, while the probability of a May cut has fallen to around 63%, from above 90% before the blockbuster jobs report released for January.

In theory, when yields go down, equity valuations go up. But the S&P 500 valuations – which are heavily influenced by the Big Technology stocks - have decoupled from the yields a few weeks ago. The 2-year yield bottomed by mid-January on realization that the Fed cut expectations had gone ahead of themselves, but the S&P 500 kept running from record to record and rose for the 14th week over the past 15 weeks – a thing that has not happened since 1972, apparently. The index closed last week above the 5000 psychological mark.

Nasdaq 100, on the other hand, recorded its 11th ATH this year. The strong economic data from the US that keeps defying the theory that the economy should slow when you hike rates, the strong earnings from big US companies (especially the tech companies that continue to surf on the AI optimism), and the slowing inflation are the major drivers of the optimism.

The decoupling is also valid from the small cap stocks. But the more the S&P 500 stocks extend their gains to fresh highs, the more it becomes difficult to find new buyers, as many investors are already on board, perhaps waiting for a dip to extend their position, in a market that forgot the formation of a dip.

On the other hand, the CFTC data shows that the net speculative positions are building against the S&P 500. It could mean two things. One: there is an increasing number of investors betting for a correction at the current levels. And two: if correction doesn’t come, these bets against the S&P 500 could turn around and help the S&P 500 extend gains. The more reasonable scenario is a correction – but hey, the rally could stretch as long as investors are willing to buy.

This week, the attention will be on the latest CPI updates. The headline inflation is expected to fall below 3% from 3.4% printed a month earlier and core inflation is seen easing from 3.9% to 3.8%. If there are no major surprises in these inflation figures, there is no reason to think that the Fed will spoil the market mood. If that’s the case, the US dollar should continue to see resistance near its 100-DMA and allow its peers to regain some field.

The EURUSD could retest its 200-DMA, that stands near 1.0830, the yen could remain offered into the 150 level, and Cable consolidate above 1.26 until Wednesday’s inflation data in Britain. Remember, inflation in Britain had surprised to the upside in the latest meeting. The BoE reminded investors that their fight against inflation was not over just yet and some MPC members even voted to hike the rates at the latest meeting. So the market sees only 75bp cut this year from the Bank of England (BoE), less than half of what was expected at the beginning of this year.

Waiting for the monthly oil reports

The positive trend of crude oil since the start of this year is becoming clearer, although the topside remains hard to drill near the $80pb level. Still, the barrel of US crude extended gains above the $77pb on Friday and is upbeat this morning – in a very slow Asian session with many Asian markets closed for Chinese New Year holiday. Israel refusing the ceasefire call from Hamas supported the latest upside move last week.

This week, OPEC and IEA will release their monthly report on Tuesday and Thursday, respectively. Attention will be paid to how they will revise their demand outlook in reaction to the global developments. In one hand, the strong US economy and Chinese stimulus measures are positive for the demand dynamics and should support oil prices beyond the geopolitical tensions.

On the other hand, the significant retreat in global interest rate cut expectations weighs on global demand outlook. One thing is sure, OPEC will keep fighting to maintain oil prices sustained until the last drop. The problem is, Biden’s US is pumping a record amount of oil to counterweigh the price increases that OPEC needs so badly.