Geopolitical conditions creating bearish pressure on the equity markets

February 20, 2023

US stocks declined lower on Friday, witnessing some selling momentum, and ended the week slightly lower amid Federal Reserve officials’ hawkish comments. The geopolitical conditions surrounding China and Russia join the recently hawkish Federal Reserve (Fed) bias and exerted bearish pressure on the equity markets.

On Friday, Federal Reserve Bank of Richmond President Thomas Barkin said that he favored a quarter-point interest rate hike in February to give the central bank “flexibility” in its quest to tamp down inflation. Meanwhile, Fed Governor Michelle Bowman said rates need to keep going higher since inflation remains much too high and they are seeing a lot of inconsistent data in economic conditions.

The higher-than-expected Producer Price Index (PPI) for January has spurred hawkish commentary by two Federal Reserve (Fed) officials, who said that rates need to be higher for longer, foreseeing them above the 5.0% threshold. On the Eurozone front, European Central Bank’s policymakers said that they will keep rates high as long as necessary and another 50 basis points (bps) rate hike in March will be needed under virtually all scenarios.

The benchmarks, S&P 500 and Dow Jones Industrial Average both declined lower on Friday as the S&P 500 was trading with losses on risk aversion after economic data revealed an uptick in inflationary pressures in the United States. The S&P 500 was down 0.3% daily and the Dow Jones Industrial Average meanwhile advanced higher with a 0.4% gain for the day. Five out of eleven sectors in the S&P 500 stayed in negative territory as the Energy sector and the Information Technology sector is the worst performing among all groups, losing 3.65% and 1.19%, respectively. The Nasdaq 100 meanwhile dropped the most with a 0.7% loss on Friday and the MSCI World index was down 0.7% for the day.

Main Pairs Movement

The US dollar edged higher on Friday, failing to preserve its upside traction, and retreated to the 103.90 area ahead of the Wall Street close amid the souring market mood. The US CPI and PPI figures reignite investors’ worries about a hawkish Federal Reserve and spurred speculations that further Federal Reserve tightening is on its way. The Money market futures show the Federal Fund Rates (FFR) climbing above 5.3% in July vs. 4.9% a couple of weeks ago.

GBP/USD advanced higher on Friday with a 0.37% gain after the cable rebounded from a daily low and climbed to a 1.2040 level amid the retreating US dollar. On the UK front, the softer UK inflation report on Tuesday contributed to speculations that the Bank of England (BoE) would not hike rates as aggressively as expected. Meanwhile, EUR/USD also witnessed some buying interest and touched a daily high above the 1.0690 mark. The pair was up almost 0.20% for the day.

Gold was trading higher with a 0.33% gain for the day after rebounding towards the $1843 area and recovered most of its daily losses during the US trading session, as the softer Consumer Price Index (CPI) for January in the US incremented the likelihood of further tightening by the Fed and exerted bearish pressure to the Gold price. Meanwhile, WTI Oil declined sharply with a 2.74% loss for the day.

Technical Analysis

GBPUSD (4-Hour Chart)

The GBPUSD has reversed its direction and advanced toward 1.2000 in the American session on Friday. The modest retreat witnessed in the US Dollar Index seems to act as a tailwind for the pair. The broad-based US Dollar (USD) strength weighed heavily on the pair in the second half of the week. Hawkish comments from Fed policymakers and the latest macroeconomic data releases revived expectations that the Fed could opt to do additional rate hikes even after May. In the domestic, the UK’s Office for National Statistics reported on Friday that Retail Sales increased by 0.5% every month in January. Although this reading came in better than the market expectation for a decrease of 0.3%, December’s print of -1% got revised lower to -1.2%, not allowing the Pound Sterling to benefit from that data.

From the technical perspective, the four-hour scale RSI indicator surged to 48 figures as of writing, suggesting that the pair were amid recovery momentum. As for the Bollinger Bands, the pair was supported by the lower band and tried to challenge the 20-period moving average, showing the pair was hovering in a range from 1.1920 to 1.2210 and waiting for a more clear signal.

Resistance: 1.2209, 1.2390

Support: 1.1924, 1.1859

XAUUSD (4-Hour Chart)

The XAUUSD regathered recovery momentum and climbed above the $1830 mark in the second half of the day on Friday, as the 10-year US Treasury bond yield turned negative on the day below 3.9%, helping XAU/USD retrace its daily decline. The US Dollar continues to build on its recovery mode from ten-month troughs, as the American economy shows signs of resilience, in the wake of the latest strong economic data. The strong United States Nonfarm Payrolls data was succeeded by the hot Consumer Price Index (CPI). Furthermore, the US Retail Sales as well as Producer Price Index (PPI) all support Federal Reserve doing an additional rate hike, with the rate likely to go beyond 5.1%.

From the technical perspective, the four-hour scale RSI indicator rallied dramatically to 48 as of writing, suggesting that the pair was recovering from the consecutive day’s losses. As for the Bollinger Bands, the pair was just breaking through the 20-period moving average and gained support during the $1820 mark of the lower band. In our view, gold will remain the downside tendency and fall to find the $1800 mark, a strong psychological level, shortly.

Resistance: 1870, 1900, 1920

Support: 1820, 1800

Economic Data