Markets challenge the Fed. Who will prevail?

1 February 2023 - 09:46

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Uncertainty about the future of US stock markets is growing in a financial context full of inconsistencies between the opinion of the markets, central banks and hedge funds. What will the S&P500 do?

Markets challenge the Fed. Who will prevail?

In the United States uncertainty reigns in a stock market context where the assets of the equity and bond market continue to be subject to purchases by retail investors. Similarly, the opinion of investment banks and investment funds seems to point in the opposite direction. What to expect from the S&P500?

The stock market continues to challenge the Fed

Many are wondering how much longer the equity rally of the US market that began in November 2022 can last. In fact, the market still seems willing to continue the bet against the Fed already discounting a rate cut since mid-2023.

Of course, not everyone agrees with this point of view. According to analysts at Morgan Stanley, investors who buy on the equity rally will be disappointed. January’s rally in prices may simply reflect the covering of many short positions following a December rich enough for short sellers. For this reason, investors could make a mistake to challenge the Fed again. These considerations have also been shared by JPMorgan Chase & Co, whose analysts argue that the economy is headed for a recession.

Hedge funds bet against Treasuries

Also on the bond sector most of the analysts of the hedge funds are skeptical regarding the recent rise in prices. Non-trading net short positions across all Treasury maturities reached 2.4 million contracts, according to the latest data from the Commodity Futures Trading Commission. A historical record: hedge funds have never been so bearish on Treasuries. The fear is that of a "hawkish" Federal Reserve at a time when bearish expectations on interest rates were forming. This gets even stranger and more interesting when we consider the fact that Treasuries literally exploded in January 2023, marking the best start to a year in more than three decades.

What to expect from the markets: S&P500 technical analysis

The US equity market continues to be in bullish territory overall. The price of the S&P500 remains above the long-term decreasing trendline and above the 200-period moving average on timeframe daily. In the same way, it is also possible to observe some reversal signals: the demand was in fact rejected by the supply near the resistance of the 4,100 points and last week, on the Heikin Ashi chart , a first red candle of indecision was closed. Presumably the market used the liquidity of the 4,100 points resistance to liquidate a large portion of its open positions pending the February 1 Fed statement.

Original article published on Italy 2023-01-31 15:50:00. Original title: I mercati sfidano la Fed. A quando la resa dei conti?

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