US equities underwent their worst back-to-back collapse since October 2020

2 December 2021, 03:08

Market Focus

US equities underwent their worst back-to-back collapse since October 2020 as Fed Chair Jerome Powell reiterated his pivot to inflation vigilance and the omicron variant continued to spread, with the U.S. confirming its first case on Wednesday. In a very volatile session, the S&P 500 erased gains after climbing almost 2% in the first half of the Wall Street hours. Dow Jones slid 1.34% to 34022.07, and Nasdaq Composite plummeted 1.83% to 15,254.05. Airlines, cruise operators and hotels also slumped. Investors flocked to the relative safety of Treasuries, with the yield on the 10-year note down to 1.404%. 

On the market front, professional traders bailing from stocks as anxiety over the omicron variant and monetary policy roil markets. Hedge funds have gone risk-off in a major way just as the S&P 500 endured a massive two-day pullback. Net leverage, a measure of industry risk appetite that takes into account long versus short positions, fell to a one-year low this week, according to data compiled by Goldman Sachs’ prime brokerage. 

The move is in contrast to retail traders, who renewed their manic dip-buying after Tuesday’s rout, pushing stocks higher by almost 2% earlier in Wednesday’s session. Then, Jerome Powell reinforced his message that the Federal Reserve would keep inflation in check as officials confirmed the first case of the omicron variant in the U.S, sparking an afternoon selloff that left the S&P 500 with its biggest reversal since April 2020. 

Few corners of the market were spared, as small caps gave up a 2.5% surge to end lower by more than 2%. Bitcoin dropped below $57,000, oil hit $65 a barrel, and Treasuries rallied on demand for safety. The S&P 500 is now down 3.1% in two sessions and more than 4% from its last record on Nov. 18. 

Main Pairs Movement

Unlike the dismal stock markets, fears seem to have cooled down a bit for forex on Wednesday, resulting in major pairs holding on to familiar levels. The Greenback ended the day mixed, firmer against its commodity-linked peers but down against other safe-haven currencies. 

Cautious optimism came from the World Health Organization, as it said that current vaccines could still offer protection against the new Omicron coronavirus variant, preventing severe illness. Also, the WHO has reported that so far, the new strain seems to be causing milder symptoms and illness. However, the risk that the Fed will bring forward its taper remains, as Fed Chair Jerome Powell has declared the need to remove the word “transitory” while describing the U.S. inflation issue. 

The EUR/USD pair is trading around 1.1320, while GBP/USD stands at 1.3280, and both are at risk of falling further. The AUD/USD pair is trading at around 0.7110, while USD/CAD is pressuring daily highs in the 1.2830 price zone. USD/JPY and USD/CHF posted mild gains, and are up 0.15% and 0.21% respectively. 

Gold remains under pressure, currently trading at $1,780 a troy ounce. Crude oil prices edged lower, with WTI now at around $65.75 a barrel, and Brent at $68.50. 

Technical Analysis

EURUSD (4- Hour Chart) 

After dropping to a weekly low around 1.124 area, EUR/USD saw some buying and rebounded slightly on Wednesday. The pair was flirting with the 1.133 area most of the day and is now sitting in negative territory and holding above the 1.132 level. The renewed strength witnessed in the Greenback weighed on EUR/USD, which is currently losing 0.06% on a daily basis. Stronger US dollar across the board today dragged the pair lower, as the DXY index rose 0.02% amid upbeat market sentiment. The US ADP Employment Change for November showed that private payrolls rose by 534K, which is more than the market’s expectations. In Europe, concerns about the new omicron variant and the likeliness of lockdown in many countries may dampen the near-term outlook for the European currency and cap the upside for the EUR/USD pair. 

On the technical side, the RSI is at 59 as of writing, suggesting that the upside appears more favoured as the RSI is still above the midline. As for the Bollinger Bands, the price is consolidating between the moving average and upper band, indicating that the bullish traction could persist for a while. In conclusion, we think that the market will be slightly bullish as the pair is heading to re-test the 1.1374 resistance. A break above that level would target 1.1464. 

Resistance: 1.1374, 1.1464, 1.1608 

Support: 1.1258, 1.1186 

GBPUSD (4- Hour Chart) 

GBP/USD edged higher on Wednesday, ending its previous slide to the lowest level since December 2020. The pair stayed steady to the north of the 1.330 level for most of the day and touched a daily top in the American session. At the time of writing, Cable remains in positive territory with a 0.08% gain for the day. The recovery in sentiment for global equity and commodity markets acted as a tailwind for the British pound, which is one of the risk-sensitive currencies. Looking at economic data, the UK Manufacturing PMI came at 58.1 for November, which is slightly lower than estimates but did little impact on Cable. Meanwhile, during his testimony before the House Financial Services Committee earlier in the session, Fed Chair Jerome Powell also reiterated that it was appropriate to consider a faster QE taper. 

For the technical aspect, the RSI indicator is at 46 of writing, suggesting that sellers remain in control of the pair’s action in the near term. As for the Bollinger Bands, the price is sitting between the moving average and lower band, indicating that the downside momentum should be stronger. In conclusion, we think the market will be bearish as long as the 1.3369 resistance line holds. The hawkish tone from Powell could limit any further gains for the cable. 

Resistance: 1.3369, 1.3514, 1.3607 

Support: 1.3195, 1.3106 

USDCAD (4- Hour Chart) 

After the previous day’s rally to a two-month high near 1.284 level, USD/CAD preserved its upside traction and edged higher on Wednesday. The pair was surrounded by bearish momentum during the Asian session, but rebounded back above 1.278 area amid renewed US dollar strength. USD/CAD now continues to climb higher and is currently rising 0.26% on a daily basis. Rising expectations for a Fed rate hike continue to lend support to the greenback and USD/CAD, as Powell said that the Fed will discuss whether to accelerate tapering by a few months at their next meeting. On top of that, the pullback in crude oil prices from earlier session peaks weighed on the commodity-linked loonie and pushed USD/CAD higher, as WTI oil dropped 1.43% for the day.

On the technical side, the RSI indicator reads 60 as of writing, suggesting that the upside appears more favoured as the RSI is still above the midline. Looking at the MACD indicator, a golden cross is forming on the histogram, which indicates an upward trend for the pair. As for the Bollinger Bands, the price is shifting from the moving average to the upper band, therefore the upside traction could persist. In conclusion, we think the market will be bullish as the pair is eyeing a test of the 1.2849 resistance.

Resistance: 1.2849, 1.2896

Support: 1.2641, 1.2493, 1.2387