Risk Appetite Firms Considerably as FOMC Meeting Comes into View

Talking Points:

• US equity markets stormed higher overnight as investors’ attention shifts to the upcoming FOMC meeting.

• A 25-basis point hike from the Federal Reserve and a signal that peak rates around not too far away could keep risk assets underpinned in the short-term.

US equity markets and risk assets in general stormed higher overnight, following an announcement from the US Treasury that appeared to assuage fears of further turmoil in the banking sector. The Dow Jones, S&P 500 and Nasdaq 100 indices were all up over 1% after Treasury Secretary Janet Yellen confirmed that the Federal Government would step in once again if needed to prevent deposit runs on smaller regional banks. This announcement resulted in the KBW Regional Banking ETF jumping over 5% higher whilst the Volatility Index (VIX) – also colloquially known as the ‘fear gauge’ – suffered its largest two-day plunge in almost a year. Attention now shifts to the upcoming Federal Open Market Committee and whether policymakers will stick to the plan and continue hiking rates or will pause amid concerns about financial stability. As it stands, the market is pricing that a 25-basis point hike is a near certainty, with only a 1-in-10 implied probability that Chair Jerome Powell and co will hold rates steady.

KBW Regional Banking Index Still Down Over 12% YTD

Given the impressive response from the Federal Reserve, US Treasury and FDIC to shore up the regional banking sector, there is a distinct possibility that policymakers will come out more hawkish than expected. After all, headline inflation is still three times higher than the central bank’s mandated 2% target and the labour market remains incredibly tight. The unemployment rate is still comfortably below 4% with job openings still tracking comfortably above the pre-pandemic average. Nevertheless, with isolated corners of capital markets beginning to feel the pinch from the Fed’s most aggressive hiking cycle, a signal that more aggressive action is on the cards would likely lead to a flight to safety and a fairly extreme risk-off response. With that in mind, the most probable scenario is that the Fed follows through with a 25-basis point hike and signals that peak rates are just around the corner.

Nasdaq 100 Index Daily Price Chart – Yearly High Resistance in Buyers’ Crosshairs

From a technical perspective, the outlook for the duration-sensitive Nasdaq 100 index remains bullish as prices track comfortably above psychological support at 12,000 and begin to pressure key resistance at the yearly high.

A series of bullish candles confirming a short-term Double Bottom reversal pattern carved out at the start of the month suggests that the path of least resistance is higher.

A daily close above 13,000 is needed to validate bullish potential and carve a path for buyers to drive the index back towards the August 2022 highs.

On the other hand, a reversal lower could be on the cards if resistance successfully suppresses buying pressure and remains intact.

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