The global stock market is witnessing its strongest weekly surge in 2023, with the S&P 500 index achieving its largest gains since April for the fourth consecutive day.
The index closed above the 200-day moving average for the first time since October 24, amid falling bond yields and stronger-than-expected corporate earnings reports. This is thanks to rising hopes that the Federal Reserve is nearing the end of its interest rate hike cycle, boosting positive sentiment and driving stock markets significantly higher.
The Federal Reserve, as expected, kept interest rates unchanged on Wednesday, with its Chairman Jerome Powell leaving room for further monetary tightening in the future.
He also acknowledged the recent impact of rising bond yields on the economy. These comments hinted that the central bank may have finished raising interest rates, leading to a drop in long-term U.S. Treasury yields and supporting the stock market. If things go as expected, the markets are expected to end this week on a particularly positive note with the release of the U.S. jobs report today, further boosting optimism about reaching the peak of global interest rates.
The S&P 500 index also achieved its best daily performance in six months, supported by strong corporate earnings that exceeded expectations. Apple, for example, announced quarterly sales and earnings that far surpassed expectations, despite a slight drop in stock prices at the beginning of today’s trading hours.
The assumption here is that the Federal Reserve, the Bank of England, the European Central Bank, and other central banks have completed their interest rate hikes.
When the Federal Reserve temporarily paused with a still hawkish tone on Wednesday, the Bank of England also temporarily paused with a similar hawkish tone on Thursday.
The market reactions were similar, resulting in significant gains in bonds, stocks, and risk assets. The ten-year bond yields experienced a noticeable decline. I believe that the three major Wall Street indices are on track to end their strongest week of the year, each achieving weekly gains of approximately 5%.
Investors are currently anticipating the timing and extent of interest rate cuts and monetary easing. The markets are pricing in approximately 70 to 75 basis points of Federal Reserve easing in 2024 and around 50 basis points of expected rate cuts in the UK.
As a result, the yield on ten-year U.S. bonds has fallen by about 40 basis points from the recent high above 5% just a few days ago, and the U.S. dollar has begun to weaken. However, it is still too early to confirm these hopes and assumptions because inflation remains elevated and far from its target of 2%, amid economic data indicators showing the strength and resilience of the U.S. market and economy.
Today, the markets are eagerly awaiting the release of the October employment report, and the results indicate that employers added 150,000 jobs during the month, which is lower than expectations. The average hourly wage reading also came in at 0.2% in October, which is also below expectations.
This will increase negative pressure on the dollar index and bond yields while giving positive strength to stocks and indices to achieve strong weekly closes.
Technical analysis of the S&P 500 prices
The S&P 500 index experienced a challenging month during October, which was not surprising considering the numerous political, economic, and geopolitical events happening around the world. With the escalating tensions in Gaza, the impact on the markets, especially stock indices, is expected to continue significantly. Therefore, I believe that the market is likely to remain volatile and range-bound based on the latest news.
Regarding the S&P 500 index, it appears that the 4404 level is currently a critical and major resistance area. If the price manages to break and firmly establish itself above this level, it may signal a broader recovery, and we can say that the bullish trend has resumed.
S&P 500 Prices Chart – MT4 Platform from XS.com
On the daily chart, breaking through the resistance at 4404 could potentially serve as a test of the 50-day moving average. The price might experience a pullback from this level, especially with the significant moving averages approaching a cross on the daily chart, which is a strong bearish signal unless the price manages to break above the mentioned resistance on the weekly close.
A bearish scenario could unfold if the price breaks below the October low at $4105, as holding below this level could open the door to further decline towards the 4000 level and then the support at $3847.36.
I believe that the stock market and indices will settle into a direction after the earnings season concludes and concerns related to geopolitical events and rising interest rates, all of which are factors that could lead to further medium to long-term declines.
The reversal below the 200-day simple moving average strongly indicates that sellers have reasserted their control over the S&P 500 index, and a return to the 4100 level may be possible in the near term, despite the strong and positive weekly close.