Sentiment deteriorated notably on Wednesday as US yields pushed to new highs, prompting selling in equities. At the time of writing, the SP500 index was down toward 4,500 USD.
Hawkish Fed troubles the markets
On Tuesday, Federal Reserve Governor Lael Brainard said the central bank must shrink its balance sheet at a rapid pace and steadily raise interest rates to fight inflation. His remarks sent US yields to new cycle highs – the 10-year yield advanced above 2.6%, while the 2-year yield rose toward 2.6%.
At the same time, the 10-year US real yield jumped to new cyclical highs at -0.38%, the level last seen during the COVID crash in March 2020.
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Later today, the FOMC minutes from the March Fed meeting will be published, probably confirming the ongoing hawkish bias among the FOMC members. At its next meeting in April, the Fed is expected to deliver a 50bps rate hike as the central bank remains widely behind inflation.
“Today’s minutes should give us an indication as to how much events in Ukraine tempered the Fed’s response last month in terms of the size of the increase in rates, and whether there was a temptation to go harder amongst other members and join Bullard in going for more than 25 basis points,” CMC Markets analyst Michael Hewson said.
Regarding the Ukraine situation, the West is considering tougher sanctions and penalties against Russia following the latter’s increased atrocities on Ukrainian civilians. In response to that, Group of Seven (G7) foreign ministers will meet on April 7, Thursday.
Index appears overbought
The daily chart seems overbought, considering the recent 10% run without any correction, likely leading to some profit-taking. As a result, the SPX index dropped nearly 1% today, falling to the psychological level of 4,500 USD, where the 200-day average is also located.
The MACD indicator is about to send a bearish signal, probably reinforcing the short-term bearish bias.
The next target for bears could be in the 4,450 USD region, followed by the previous swing highs near 4,400 USD. As long as the index remains above 4,400 USD, the medium-term outlook seems cautiously bullish.
Alternatively, if sentiment improves during the US session, we might see another rally, targeting the 4,600 USD region.