USA500: VIX Surges, US Stock Indices in Red Zone

Rising expectations of further interest rate hikes, and the belief that the Fed will keep rates elevated for an extended period of time, have proven to be important supports for the Dollar’s strength in August-October. Fed Chairman Jerome Powell said on Thursday, that various uncertainties, both old and new, make it difficult for the Fed to balance the risk of too much monetary policy tightening with the risk of too little tightening and the central bank will proceed cautiously, for that reason.

According to Fed Powell, over-tightening could damage the economy, while taking less action than necessary could allow above-target inflation to become entrenched and then lead to stronger tightening which would significantly hurt the labour market. The road to a sustainable 2% inflation target is likely to be bumpy and time-consuming, although economic growth has consistently shown a surprising pick-up in 2023. Geopolitical tensions are high and pose important risks to global economic activity and the recent rise in bond yields has been one of the main causes of further tightening of financial conditions.

From US economic data, initial jobless claims fell -13k to 198k in the week ending 14 October, below expectations of 210k. The 4-week moving average of initial claims fell by -1k to 206k. Continuing claims rose 29k to 1743k in the week ended 7 October. The four-week moving average of continuing claims rose 19K to 1694K.

US Stock Indices are in red, after Fed Chair Jerome Powell noted the central bank’s monetary policy has not been too tight and pointed to various uncertainties that could complicate the Fed’s work. The USA30 index closed with a loss of -0.75%, the USA100 fell -0.85% pulled down by Tesla’s -9.30% decline. The USA500 was down 0.85% at the close with Genuine Parts down -12.51%. On the positive side, Netflix was +16% after reporting a larger-than-expected increase in paid streaming members in Q3. In addition, AT&T and Las Vegas Sands rallied over +2% after reporting better-than-expected Q3 EPS.

Rising bond yields on Thursday pressured stocks after the 10 T-note yield rose to a fresh 16-year high. Moreover, an unexpected drop in US weekly jobless claims to an 8-month low signalled labour market strength that might encourage the Fed to keep interest rates higher for a longer period of time.

Technical Review

The Volatility Index (VIX) is widely regarded as a leading indicator of US equity market volatility, based on real-time options prices for the S&P500 Index. On Thursday’s trading, the VIX surpassed the crucial 20.00 level which signalled the market pressing the panic button for risk aversion amid ongoing earnings reports.

The USA500 continued to decline for the third consecutive day, after breaking away from the minor support of 4310.92. The flat 200 EMA slope does not yet give any significant indication for a change in direction, but a USA500 move below 4200.82 could send a short-term bearish market signal to reach multiple retracement levels. The conflict in the Middle East is suppressing sentiment amid earnings reports that are expected to improve. However, what if earnings disappoint with current conditions? Perhaps we will see a trendline break and short-term exposure increase from relatively low levels. As long as the 4200.82 support holds, a number of rebounds could apply, and a move above 4397.78 could indicate a confirmation point for the continuation of the bullish trend again.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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