Markets Fear the Return of a “Hawkish” Fed

Markets are considering whether the Federal Reserve’s less hawkish policy may be in doubt. This is the main story that has been driving the markets over the past 24 hours. The equity markets including both US and global stocks have increased in value by over 13% based on a lower rate hike or a potential halt in the near future. However, this was only likely if the US economy continued to see poor economic data.

The US has had 2 days of positive employment data, first the NFP, Average Hourly Earnings and Unemployment Rate on Friday. Yesterday the ISM PMI read 56.5, which is higher than the expected 53.5 and higher than the 54.4 seen in November. For this reason, traders will eagerly look at Friday’s Producer Price Index. If the PPI is higher than 0.2%, the equity markets can come under further pressure.

This is why the US Dollar found some support and pushed above 105.00 on the US Dollar Index. However, traders should note that most economists still believe that the regulator will opt for a lower rate hike. Goldman Sachs has advised the Fed are able to lower their hikes to 0.50% because their policy has been very restrictive over the past 4 months. Bloomberg has advised a 75 basis point hike is only likely if the PPI is higher than expected and next week’s Consumer Price Index is at 0.6% as a minimum.

Crude Oil

Crude Oil was amongst the assets which saw the largest and sharpest decline within the financial trading markets on Monday. The price declined by 3.68% based on Friday’s closing price but the price declined by more than 7% during the US trading markets.

Trend indicators are currently still providing signals that the price may potentially decline further. Yesterday the price also received very clear signals from bearish breakouts at the $80.07 and $79.67 levels. Due to this morning's retracement, the price is also not currently indicating an oversold price condition. Traders looking to short the market further will aim for another breakout of the $76.84 level. Traders should also note the historic support levels were formed at $75.26 and $73.64. 

Crude Oil 30-Minutes Chart on December 6th

The price has been influenced by opposing factors and this is why it is important to also analyze the price and order flow. The price has been supported by the news of China taking a softer COVID policy and also of a resilient US economy. Both are indications that the level of demand can increase. However, the price has also been pressured by a potential further interest rate hike of 0.75%. This significantly pressured the price of Oil in the past.

The price also declined after OPEC decided not to reduce their production levels and also generally showed unity amongst OPEC members and Russia. This is mainly due to supply fears fading. However, this can change because of the recent price cap agreed in the US, EU and Australia.

Though most economists have advised, this may not affect the market as the price cap is above that which Russia is currently selling its commodities. The supply levels may only be threatened if Russia reacts or after February when sanctions intensify.

NASDAQ

The NASDAQ has been the worst-performing US Index due to the restrictive monetary policy. A change in monetary policy is known to affect the technology sector the most and the Dow Jones the least. Yesterday, the NASDAQ declined by 1.65% and formed a descending triangle which is known as a bearish signal.

During yesterday’s trading session, only 5 stocks out of the 100 components managed to end the day higher. The stock which saw the strongest increase was Baidu and the strongest decline was seen amongst DocuSign, Lucid Group and MercadoLibre.

Technology companies have come under immense pressure after most CEOs explained to investors that 2023 is likely to be a difficult year, and most tech companies continue to lay off employees. For example, Alphabet is the latest firm to see its stock target decrease. Mizuho Bank reduced its target price from $140 to $135.

You can also watch this morning’s Trading Geeks Analysis via the video below for further information on technical analysis (NASDAQ Charts).

Summary:

• The US Dollar was supported by yesterday's ISM PMI but stocks have come under pressure.
• Traders are evaluating whether a lower rate hike is in doubt but will focus on Friday’s Producer Price Index.
• Bloomberg has advised a 75 basis point hike is only likely if the PPI is higher than expected and next week’s CPI is at 0.6% as a minimum.
• Crude Oil see’s its largest decline so far this month. Experts advise Price Caps may not affect the market until next year.
• Only 5 stocks within the NASDAQ manage to end the day higher after the index again declines.