Dow Jones, Russell 2000, Federal Reserve, Coronavirus Vaccinations, Covid-19 Hospitalizations – Talking Points:
- Equity markets nudged marginally higher during APAC trade as investors continue to grapple with coronavirus developments.
- The recent unwinding of the reopening trade has weighed on the Russell 2000 and Dow Jones.
- However, this may prove short-lived given the bright medium-term economic outlook.
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Asia-Pacific Recap
Equity markets crept marginally higher during Asia-Pacific trade, as investors digested the pace of the global economy’s rebound from the coronavirus pandemic. Australia’s ASX 200 nudged 0.17% higher alongside Hong Kong’s Hang Seng Index, while Japan’s Nikkei 225 surged 1.14%. China’s CSI 300 dropped slightly lower on fears that several Chinese tech companies could be delisted from US exchanges.
In FX markets, the risk-linked AUD, NZD, CAD and NOK largely outperformed, while the haven-associated USD, JPY and CHF slid lower. Oil prices fell back below $61 per barrel as progress was made on dislodging the container ship currently impeding travel along the Suez Canal. Gold prices also drifted lower as yields on US 10-year Treasuries climbed 1 basis-point higher.
Looking ahead, US Q4 GDP figures headline the economic docket alongside continuing jobless claims and PCE data.
Dow Jones, Russell 2000 Under Pressure on Unwind of Reopening Trade
The US benchmark Dow Jones, and small-cap centric Russell 2000 have slipped significantly lower in recent days after surging to set fresh record highs just over a week ago, as market participants digest the rapid rise in Treasury yields and the possibility of a prolonged global economic recovery.
A resurgence of coronavirus infections in Europe has notably weighed on market sentiment, after German Chancellor Angela Merkel announced a snap 5-day lockdown starting on April 1 – which she later walked back – and governments in France, Italy and the Netherlands extended their respective restrictive measures.
The marked sell-off in longer-dated US Treasury bonds can also be attributed to the recent pullback in US benchmark equities, as the provision of substantial fiscal stimulus, rapid local vaccination distribution, and better-than-expected economic data fuels bets that the Federal Reserve will have to normalize its monetary policy settings earlier than originally forecast.
US Covid-19 Hospitalizations
Source – CDC
However, this seems highly unlikely given the consistent commentary from Fed Chair Jerome Powell. Powell has continuously stated that the central bank remains short of achieving the level of progress needed to begin talking about normalization, and has reiterated that the Fed “will continue to provide the economy the support that it needs for as long as it takes”.
Moreover, over 25% of Americans have received at least one dose of a coronavirus vaccine, which puts the nation on track to begin to return to a level of normality in the coming months. Indeed, hospitalizations due to Covid-19 infections have declined to the lowest levels since early-September 2020.
Therefore, given the relatively bright medium-term outlook, a more extended decline in US asset prices seems relatively unlikely, with most of the recent weakness probably coming down to quarter-end rebalancing and short-term uncertainty.
Dow Jones Daily Chart – Consolidating Above Confluent Support
Chart prepared by Daniel Moss, created using Tradingview
From a technical perspective, the outlook for the Dow Jones remains constructive, as price continues to respect the uptrend extending from the March 2020 nadir and consolidates above the 50% Fibonacci (32170).
With the RSI hovering comfortably above its neutral midpoint, and price tracking firmly above all 6 moving averages, the path of least resistance seems higher.
If support at 32000 holds firm, a retest of the yearly high (33116) looks likely in the near term, with a daily close above required to bring the 34000 mark into the crosshairs.
However, penetrating the 32000 could open the door for sellers to drive the index back towards the trend-defining 55-EMA (31436).
The IG Client Sentiment Report shows 34.07% of traders are net-long with the ratio of traders short to long at 1.94 to 1. The number of traders net-long is 7.52% lower than yesterday and 35.16% higher from last week, while the number of traders net-short is 3.35% lower than yesterday and 26.79% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Dow Jones prices may continue to rise.
Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed Dow Jones trading bias.
Russell 2000 Daily Chart – Eyeing March Uptrend Support
Chart prepared by Daniel Moss, created with Tradingview
The Russell 2000 looks at slightly more risk of a more extended pullback than the Dow Jones, as prices dive convincingly below the trend-defining 55-EMA for the first time since November 2020.
However, with the RSI notably U-turning back above 40, and the uptrend extending from the March 2020 lows still intact, the technical outlook remains skewed to the upside.
Nevertheless, prices may slide back towards range support at 2085 – 2105 in the coming days, if buyers are unable to gain a firm foothold back above the psychologically pivotal 2200 mark.
If buyers are indeed successful, a retest of the yearly high (2368) could be on the cards.
-- Written by Daniel Moss, Analyst for DailyFX
Follow me on Twitter @DanielGMoss