Equities Keep Marching North Despite Yield Curve Inversion

With no game-changing events taking place yesterday, most stock indices continued drifting north, perhaps also aided by the fact that diplomats from Russia and Ukraine will hold new peace talks today, in Turkey. That said, we also saw some concerns arising as well, over the performance of the US economy in a few years, and this was evident by the flattening and inversion of the 3yr-30yr part of the US Treasury yield curve.

GLOBAL STOCK INDICES CONTINUE TO CLIMB HIGHER, NASDAQ LEADS

The US dollar traded higher against most of the other major currencies on Monday and during the Asian session Tuesday. It gained the most versus NZD, AUD, and GBP, in that order, while it underperformed only against EUR. The greenback was found virtually unchanged against CHF.

The relative strength of the US dollar and the safe-haven franc suggests that markets may have traded in a risk-off fashion yesterday and today in Asia. However, the strength of the risk-linked Aussie and Kiwi points otherwise. Indeed, turning our gaze to the equity world, we see that major EU and US indices traded in the green, with the only exception being UK’s FTSE 100. Appetite stayed supported during the Asian session today as well. Among the stock indices under our radar, only China’s Shanghai Composite lost some ground. Maybe that’s because several Chinese cities entered new lockdowns due to the acceleration in the COVID-19 spreading.

With no dramatic events to change the course of the markets, most equity indices continued to respect their latest path of least resistance, which is to the upside. What may have helped investors to add to their risk exposures may have been the fact that diplomats from Russia and Ukraine will hold new peace talks today, in Turkey. Although officials played down the chances of a major breakthrough, the fact that we have a new round of talks allows a glimpse of hope that some progress could be made, no matter how small it is.

Now, our own view remains the same as last week. Despite the war still going on in Ukraine, and despite most major central banks beginning their tightening cycles, we still believe that equities could continue trading higher for a while more. And this is for the same reasons we mentioned last week. We observed that the setbacks in negative headlines are smaller than the advances we get when there is hope, while the increasing expectations over a more aggressive rate path by the Fed seem to have not affected the attractiveness of major growth stocks. In our view, this means that, barring any other nation getting involved militarily in the war, the conflict at a two-nations level may have been already priced in, something which may also be true with regards to an aggressive tightening path by the Fed.

However, we are still far from calling for a long-lasting recovery. We prefer to focus on the short-term picture for now. After all, the war is still raging, and the chances of escalating to something worse are not zero. What’s more, although the US yield curve remains very steep up until the 2yr yield, the 3yr — 30yr part has flatten, with some smaller parts being inverted for the first time since early 2006. This suggests that market participants believe that the Fed’s tightening plans will put the brakes on economic growth in a few years.

NASDAQ 100 — TECHNICAL OUTLOOK

The Nasdaq 100 cash index traded higher again yesterday, breaking above the 14845 barrier, marked by Friday’s high. The move confirmed a forthcoming higher high, and combined with the fact that the index continues to trade above the prior downside resistance line drawn from the high of February 2nd, keeps the short-term picture positive.

At the time of writing, the price is approaching the 15060 barrier, marked by the highs of February 9th and 10th, where a break could allow the advance to extend towards the 15275 level, marked by the high of February 2nd, or the 15365 zone, defined by the high of January 20th. If the bulls are not willing to stop there either, then we may see them climbing towards the 15650 territory, defined as a resistance by the peaks of January 16th and 17th.

We will start examining the case of a decent correction lower upon a break below 14660, marked by yesterday’s low. This could encourage the bears to push towards the 14450 zone, marked by the low of March 23rd, where another break could carry extensions towards the low of March 21st, at 14185. If that barrier doesn’t hold, then its break may set the stage for the 13975 territory, marked by the low of March 18th.

EUR/USD — TECHNICAL OUTLOOK

EUR/USD traded higher yesterday, after it hit support at 1.0945. However, the recovery stayed limited below the downside resistance line drawn from the high of February 10th, which keeps the chances for another round of selling well on the table.

That said, in order to get confident over a new leg south, we would like to see a clear and decisive dip below 1.0900, a support marked by the low of March 14th. This could initially pave the way towards the 1.0807 level, marked by the low of March 7th, or the 1.0775 barrier, marked by the low of May 14th, 2020. Another break, below 1.0775, could see scope for more bearish implications, perhaps opening the path towards the low of March 22nd, 2020, at 1.0635.

On the upside, we would like to see a clear break above 1.1040 before we start examining the case of a bullish reversal. This may signal the break above the aforementioned downside line and may initially target the high of March 17th, at around 1.1145. A break higher could invite more bulls into the game, who could lead the action towards the 1.1235 zone, marked by the high of March 1st, or towards the 1.1290 zone, which acted as a strong support between February 14th and 22nd.

AS FOR TODAY’S EVENTS

Like yesterday, the calendar is very light, with the only releases worth mentioning being Germany’s retail sales for February, the US Conference Board consumer confidence index for March, and the JOLTs Job Openings for February.

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