US and European futures are starting the week on the back foot after recording a stellar performance last week. The main reason we saw the US equity markets soaring last week was that investors became overly enthusiastic about the US inflation reading, showing a significant drop from its 40-year high. The S&P 500 saw its greatest weekly performance since June, with a 5.9% gain last week. The reading made traders believe that inflation is likely to move in one direction and will continue to move in this direction at the same pace.
However, a lot of that reaction was overly enthusiastic. This is because a large number of fundamentals are still very much concerning. For instance, almost every day, we hear from US and European companies that they are either freeing the hiring process or letting people go. With the employment market moving in this direction, oil prices not losing momentum, and interest rates still moving, higher disposable income is a significant problem.
Hence the possibility of a recession or even a depression is strong. Hence, it is highly likely that the rally that we experienced last week nothing more than a bear market rally, and bear market rallies are usually are short-lived.
Technical indicators are showing a lot more promise as the price of most US indices has moved above important averages such as the 50, 100, and even 200-day SMAs on the daily time frames, which provides more confidence for investors and traders to go heavy with on their long bets.
Futures contracts for the Dow Jones Industrial Average dropped 84 points or 0.25 per cent. Futures contracts for the S&P 500 fell by 0.32%, while those for the Nasdaq 100 traded down by 0.55%.
The US mid-term elections, which also kept traders on their feet last week, will relieve many investors this week. This is chiefly because it is anticipated that Democrats will maintain their majority in the Senate. Democrats will possess at least 50 seats in the critical arena. Challenges against Mark Kelly of Arizona and Catherine Cortez Masto of Nevada failed.
Finally, for earnings, the focus will be on retail earnings as tech earnings very much moved the markets in the previous weeks. Mega retail companies like Walmart, Home Depot, Target, Lowe’s, Macy’s, and others will report this week. Their earnings are mainly going to be about consumer spending. We believe there will be many cautions, and the bar is set high as these companies will have to compete in every aspect to score gains. A small failure, such as supply chain issues, inflation-related pressure, or even a weak forecast, will adversely influence their price, and the spillover effect could push the markets lower.
The crypto world is still reeling from the FTX debacle, and traders are still shocked that Ponzi schemes can still take place at that level. It isn’t easy to believe that a person who was rubbing shoulders with like Tony Blair and Bill Clinton and providing massive donors to the Biden administration party could do something like this. It is clear now that regulators will not sit on their hands as FTX played with customer funds, which could bring a new wave of regulations to the unregulated market.
As for bitcoin, traders need to understand that events like FTX or Luna would only flush more bad people out of the system. This means traders must pay attention to fundamentals that are likely to improve. Institutional investors may delay their involvement as they seek more participation from regulators. Still, many would also be excited about the current price action and the opportunity it brings.