S&P500 shines despite a tumultuous start to 2021

While on holiday over the past week, it allowed me to watch from a distance the dust settle after a tumultuous first week of the New Year.

Charts (1)

For markets, at the heart of the matter is the surprise win by the Democrats in the Georgia Senate run-offs, which brings with it the promise of even more fiscal stimulus and triggered a technical break higher in US 10-year yields, a development we wrote about here.

Since that article, US 10-year yields have rallied another 14bp, taking gains in January to 28bps. This has raised fears that higher rates might present a threat to equities, as they did in the last quarter of 2018, when a 45bp rise in yields, triggered a 20% decline in the S&P500.   

However, as made clear by the four Fed speakers on the wires overnight, Mester, Bullard, George, and Rosengren, it will be some time before the Fed considers any tapering measures during the current cycle.

This is in line with the Fed's aim to see inflation rise while continuing to suppress nominal interest rates. Thereby keeping real interest rates pinned at deeply negative levels to help deflate away ballooning government debt.

Along with a supportive fiscal environment, the backdrop therefore remains supportive for the S&P500 in 2021, despite concerns surrounding the future regulation of “Big Tech” companies following the Democrats win in the Georgia run-offs.

Technically, the ability of the S&P500 to reclaim and close above the trend channel resistance overnight keeps the January 7 break higher intact. Providing the S&P500 remains above support from the overnight 3768 low, the expectation is for prices to extend towards the next upside target at 3900, with upside risks towards 4000.

Keeping in mind, should the S&P500 fall much below 3768ish it would warn the January 7 break higher has failed for now and the risks are for a deeper pullback towards near term support 3630/20.

S&P500 shines despite a tumultuous start to 2021

Source Tradingview. The figures stated areas of the 13th of January 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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