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Is a stock market meltdown imminent?

Contrary to some fears of an imminent stock market meltdown, the U.S. economy has shown remarkable resilience in the face of looming recession concerns and interest rate hikes. Despite occasional retracements, the S&P 500 has maintained its long-term bullish trend, reflecting the stock market’s historical tendency to yield long-term gains. With an annual GDP growth of 4.9% in the third quarter, even amid a significant rate hike cycle, the economic outlook contradicts earlier gloomy forecasts, providing reassurance to investors.

Data-packed week ahead

This week promises a data-packed frenzy that will not only impact the markets but also set the tone for fourth-quarter GDP growth. From Tuesday to Friday, a barrage of economic indicators will be released, including the Employment Cost Index, Home Prices, ADP, JOLTS, ISM manufacturing, Fed updates, Unit Labor Costs, non-farm productivity, jobless claims, durable goods and the jobs report. These data points will influence the volatility of the U.S. dollar and interest rates, which, in turn, will guide equity market movements.

U.S. dollar poised for strength

The U.S. dollar appears poised for an upward trajectory, with a potential move toward the 109 level on the dollar index. While this scenario hinges on supportive data releases and Federal Reserve messaging, the dollar index has all the necessary ingredients for the potential bull run. Additionally, bearish patterns and fundamental weaknesses are evident in the euro, yen and gbp, suggesting a relative strengthening of the U.S. dollar.

10-year rate consolidating

Simultaneously, 10-year rates are consolidating around the 5% mark, indicating a likely move higher, potentially reaching 5.25%. This rate movement isn’t exclusive to the U.S., as investors globally reassess the risks they are taking relative to the rates they receive.

Europe under pressure

Recession is imminent in Europe. Equities are pressured not only by rising rates but also by the ongoing contraction of GDP. The assumption that rates would remain low has shifted to “higher for longer”, causing stocks to be incorrectly priced relative to bond yields. As long as rates and the dollar continue to climb, the repricing of risk is likely to persist.

Geopolitical uncertainty in Israel-Hamas conflict

The outcome of the Israel-Hamas conflict remains highly uncertain, and the potential escalation or involvement of other parties could indeed have severe adverse implications for stock markets, as geopolitical tensions can introduce unpredictability and disrupt investor confidence.

 

For those seeking insights into when stocks may halt their decline, pay attention to macroeconomic data, bond market dynamics and the dollar’s performance. These fundamentals can signal when equities are nearing the end of their downturn, serving as valuable guides for investors.


For more insights and analysis, visit Uptrendpicks.com

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