In the opening of the U.S. stock market on Wednesday, a cautious sentiment prevailed among investors, primarily driven by concerns regarding elevated bond yields and the recent surge in oil prices, which has reignited apprehensions surrounding inflation.
Here's a snapshot of the market performance at the opening:
This cautious atmosphere followed a similar trend from the previous day, with all major indices - the Dow, S&P 500, and Nasdaq Composite - closing lower as U.S. investors resumed trading following a three-day holiday weekend.
The prevailing market sentiment can be attributed to the proximity of benchmark Treasury yields, which have been hovering near multiyear highs. Additionally, oil prices have approached their highest levels in 2023, contributing to concerns about resurging inflationary pressures.
On Tuesday, the price of Brent crude, which exceeded $90 per barrel, marked its highest point since November. This surge was instigated by the joint decision of Saudi Arabia and Russia to extend production cuts until the end of the year. Brent crude, however, moderated slightly to $89.83 early on Wednesday.
The rise in energy prices has raised alarms about the potential revival of inflation, a factor that may compel central banks to maintain elevated borrowing costs for an extended period. The 10-year Treasury yield, which had dipped below 4.10% at one point last Friday, rebounded to 4.25% early on Wednesday, positioning it just 11 basis points below the 16-year peak recorded in September.
Stephen Innes, Managing Partner at SPI Asset Management, noted the potential challenges this situation poses, saying, "[W]hile oil bulls are dancing in the street, the notable price uptick could prove challenging for central banks and financial markets, which were embellishing the current lower inflation groove…if bonds are selling off mainly thanks to higher inflation expectations, that truly will be bad news for markets."
Investors are closely monitoring the release of the Federal Reserve's Beige Book at 2 p.m. Eastern time for insights into the economic landscape.
The Commerce Department reported a 2% widening of the U.S. international trade deficit in July to $65 billion, deviating slightly from economists' earlier forecasts of a seasonally adjusted deficit of $68 billion. This figure was an adjustment from the initial estimate of a $65.5 billion deficit in June, which was later revised down to $63.7 billion.
Other economic updates scheduled for release on Wednesday include the final reading of the S&P U.S. services PMI for August at 9:45 a.m. and the ISM services report for August at 10 a.m.
Meanwhile, Boston Fed President Susan Collins expressed her expectation that the U.S. economy would start to soften towards the end of the year, with subdued growth persisting into 2024.
Mark Newton, Head of Technical Strategy at Fundstrat, acknowledged the potential impact of rising bond yields on U.S. stocks, foreseeing "short-term selling pressure." He also noted that technology shares had offered some respite in Tuesday's market performance.
Key support levels for the S&P 500 index were identified at 4458, near a 38.2% Fibonacci retracement from mid-August, with additional support at 4439. A breach of 4415 could potentially lead to a more substantial period of weakness and a retest of August lows. Newton did not anticipate a severe decline in September, expecting that any further dips would find support mid-month before rebounding. However, he suggested that Tuesday's drop might extend slightly lower before encountering support and ultimately trending upward.
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