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S&P 500 rises despite disastrous US economic data, but recession fears could limit gains


US OUTLOOK:

  • S&P 500 rises 0.95% to 3,795, but remains trapped in bear market area
  • Despite the late day rally, sentiment is fragile amid signs that the US economy is declining rapidly and aggressively
  • End of quarter rebalancing activity may support equities in the coming days, but gains may be short-lived amid increased uncertainty.

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After a subdued performance for most of the day, US equities managed to achieve a surprising late-day surge, with the S&P 500 rising 0.95% to 3,795, supported by moderate strength in the technology sector. Although the stock index came close to breaking out of bear market area, it was unable to do so as buying pressure was insufficient to push prices decisively above the 3,800 area. Despite today’s progress, there is no reason to be particularly bullish at this stage, as the outlook remains bleak for risk assets on growing signs of trouble for the economy.

Wall Street anxiety increased after U.S. macro data showed a sharp slowdown in economic activity at the end of the second quarter, increasing the possibility of a further contraction in gross domestic product in that period. For context, the S&P Global Flash Composite PMI, which follows business trends across both the manufacturing and service sectors, fell to a five-month low of 51.2 in June, and barely managed to stay in expansionary territory amid a slump in demand.

With sentiment dominated by concerns about a downturn, U.S. treasury yields have begun to decline across the curve from their recent highs on betting the Bold floor flickers at some point and reverse course once economic carnage becomes unbearable.

So far, there is no indication that the US Federal Reserve will turn around and slow down its tightening cycle despite the many winds ahead. On the contrary, Fed Chairman Powell doubled this week on falconry rhetoric during his congressional testimony, indicating that policymakers are an unconditional commitment and the determination to restore price stabilitya sign that the bank will do everything necessary to tame inflation.

With a focus on upcoming potential catalysts, the U.S. economic calendar will be light on Friday, but there will be several high-impact events next week, including the release of durable goods orders, June consumer confidence and With PCE data.

As the second term draws to a close, funds rebalancing, a practice involving readjusting a portfolio’s weights by buying or selling assets to return allotment rates to predetermined levels, could spur stock buying activity and fuel a late-month rally on Wall Street. However, any gains may be temporary in the midst of a reduced appetite for risk-taking before the next earnings season, when companies may start issuing negative profit warnings and reduce their prospects.

S&P 500 TECHNICAL ANALYSIS

The S&P 500 sank aggressively last week, setting a fresh low for the year, but did not exceed technical support from 3,700 to 3,665. If this floor holds and prices continue with their slow pull upwards, bulls can be encouraged to jump back, but to have confidence that the worst is over, we should see a clear break above 3 810, followed by a move above 4,000.

On the other hand, if sellers regain control of the market and push the index below 3,700 / 3,665, all bets are off. Under this scenario, downward pressure could be amplified, paving the way for a slide to the 3,500 area, a crucial support created by the 50% Fibonacci iteration of the 2020/2022 rally.

S&P 500 TECHNICAL CARD

S&P 500 Daily Chart Prepared Using TradingView

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