The S&P 500 index has been showing remarkable strength in the face of various challenges, such as inflation fears, global banking troubles, and economic data. The index has bounced around the 4500 level, which is a key psychological and technical barrier, and has managed to stay in an overall uptrend. What are the factors behind the S&P 500’s resilience, and what are the potential risks and opportunities ahead?
Inflation Concerns and Fed Policy
One of the main drivers of the market sentiment and direction is the inflation outlook and the Federal Reserve’s response to it. The Fed has maintained that inflation is transitory and that it will keep its accommodative monetary policy until the economy reaches its goals of full employment and price stability. However, some investors are skeptical about this stance, especially as inflation indicators have been rising faster than expected.
The latest data showed that the core personal consumption expenditures (PCE) index, which is the Fed’s preferred measure of inflation, rose by 3.6% year-over-year in July, the highest level since 1991. This was above the Fed’s target of 2%, and raised concerns that the Fed may have to taper its asset purchases and hike interest rates sooner than anticipated.
However, the market seemed to shrug off this data, as it was in line with the consensus forecast, and as other economic indicators suggested a slowdown in growth. For instance, the ISM Services index, which measures the activity of the service sector, fell to 61.7 in August from 64.1 in July, indicating a moderation in expansion. The ADP private payrolls report also showed a disappointing increase of 374,000 jobs in August, well below the expected 613,000.
These data points fueled hopes that the Fed may delay its tapering announcement, which was widely expected to happen in September or November. The market also anticipated that the nonfarm payrolls report, which is due on Friday, may show a similar weakness in job creation. This could ease the pressure on the Fed to tighten its policy and support the stock market.
Global Banking Troubles and Liquidity Injection
Another factor that influenced the market mood was the news of troubles in the global banking system, particularly in China. The Chinese authorities have been cracking down on various sectors, such as technology, education, and gaming, which has caused a sell-off in Chinese stocks and bonds. This has also affected some Chinese banks, which have been facing liquidity problems and default risks.
One of the most prominent cases was that of China Evergrande Group, which is one of the largest property developers in China and one of the most indebted companies in the world. The company has been struggling to repay its debts, which amount to more than $300 billion, and has been facing protests from its suppliers, contractors, and investors. The company’s shares and bonds have plunged to record lows, raising fears of a possible contagion effect on other Chinese companies and banks.
The market was worried that this could trigger a financial crisis in China and spill over to other emerging markets and developed countries. However, some analysts argued that the Chinese authorities have enough tools and resources to prevent a systemic collapse and to contain the impact of their regulatory actions. Moreover, some investors speculated that the troubles in the banking system could prompt the central banks around the world to inject more liquidity into the markets, which could boost asset prices.
This was evident in the reaction of the S&P 500 index on Monday, when it dropped sharply in early trading but recovered later in the day after reports that the People’s Bank of China (PBOC) injected 120 billion yuan ($18.6 billion) into the banking system through its medium-term lending facility (MLF). This was seen as a sign that the PBOC was trying to ease liquidity conditions and support growth amid regulatory pressures.
Psychological and Technical Levels
A third factor that affected the S&P 500 index was the psychological and technical levels that acted as support and resistance for its movements. The index has been hovering around the 4500 level for several days, which is a round number that attracts attention from traders and investors. This level also coincides with some technical indicators, such as the 50-day exponential moving average (EMA) and the previous week’s high.
The 50-day EMA is a widely followed trend indicator that shows the average price of the index over the past 50 days, adjusted for recent price movements. The previous week’s high is a simple measure of the highest price that the index reached in the previous week. Both indicators can serve as potential support or resistance levels, depending on whether the index is above or below them.
The S&P 500 index has been trading above both indicators for most of the time, which suggests that it is in an uptrend and that buyers are in control. However, the index has also faced some selling pressure near these levels, which indicates that sellers are also active and that the market is not one-sided. The index has bounced around these levels, testing them repeatedly and creating a range-bound pattern.
The market is waiting for a clear break of this pattern, either to the upside or to the downside, to confirm the next direction of the index. A break above the 4500 level could open the door for further gains, possibly towards the 4600 level or higher, as suggested by some analysts. A break below the 50-day EMA could signal a change in trend and a deeper correction, possibly towards the 4400 level or lower, as warned by some experts.
The S&P 500 index has been showing resilience despite market volatility, driven by various factors such as inflation concerns, global banking troubles, and psychological and technical levels. The index has bounced around the 4500 level, which is a key barrier for its movements. The market is looking for a decisive break of this level to determine the next direction of the index. The upcoming economic data and events, such as the nonfarm payrolls report and the Fed meeting, could provide the catalysts for such a break.
