U.S. stocks enter bear market, Dow accelerates decline

Although the recent U.S. economic data performance was due to expectations, U.S. stocks still recorded continuous declines, mainly due to the aggressive interest rate hikes by the Federal Reserve, the Dow Jones dollar and U.S. bond yields continued to rise, and the overall environment for U.S. stocks deteriorated. Looking ahead, investors can focus on the PCE inflation data this Friday.

U.S. stocks have entered bear market territory

U.S. Treasury yields surged to levels not seen in years after the Federal Reserve decided last week to raise interest rates by 75 basis points to achieve price stability. The two-year Treasury yield hit 4.3% yesterday, its highest level since 2007, while the 10-year yield hit 3.83%, a 2010 high.

Higher U.S. bond yields have attracted hot money investment, driving the dollar index to continue to appreciate. After the US dollar index recently hit the 114 mark, it once again refreshed the highest price since 2002. But the negative consequence of a stronger dollar is that it has put downward pressure on other assets such as commodities. A stronger dollar has made crude oil and gold more expensive relative to foreign buyers and sparked fears of falling demand. Crude oil and gold prices were similarly sharp overnight. go lower.

The new normal of high oil prices and tightening global financial conditions has heightened fears of a global recession, fueling volatility and risk aversion. Negative sentiment is already evident in the U.S. stock market: the stock market slumps and the Dow Jones officially closes in bear market territory.

good news? bad news!

Risk aversion persisted overnight even as U.S. economic data beat expectations, after Monday's rout in sterling and U.K. bond markets spilled over to the U.S., sending investors fleeing into safe-haven assets.

The S&P 500, Dow Jones and Nasdaq 100 all posted five-day losing streaks on Tuesday. Among them, the S&P 500 index continued to fall and refreshed the lowest level of the year; the Dow Jones index officially entered a technical bear market, and the Nasdaq 100 was hovering near a key support range. Investors' risk appetite is at stake, as soaring inflation and tightening financial conditions are expected to trigger an economic downturn that hints at weak fundamental developments in U.S. stocks.

In the overnight market, U.S. stocks showed upward momentum in early trading, but the three major stock indexes eventually gave up their gains and succumbed to further gains in the U.S. dollar and U.S. bond yields. The S&P 500 and Dow Jones closed down 0.42% and 0.20%, respectively, their sixth straight day of losses. The Nasdaq 100 ended modestly up 0.16%.

Although the US economic data recorded a better-than-expected performance overnight, the overall negative sentiment is still blowing. Data showed that U.S. capital durable goods orders, excluding defense and aircraft, rose 1.3% month-on-month in August, the highest level since April 2021. New home sales unexpectedly rose in August, a reflection of prices falling even as interest rates continued to rise. Finally, the Richmond Fed Manufacturing Index for September and the CB Consumer Confidence for the same month both recorded better-than-expected performances.

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Better-than-expected economic data is expected to further confirm the space for the Fed to continue aggressively raising interest rates and tightening its cycle. For the current stock market, "good news is bad news", and better data has further strengthened the Fed's pace of interest rate hikes. Against this backdrop, 7 of all 11 Dow sectors recorded losses, the only one recording gains was the energy sector. That was as oil prices rebounded from a near nine-month low that touched $79.45 a barrel at one point, boosted by expectations that a hurricane in Mexico could cause supply disruptions. On the other hand, it is reported that OPCE+ may announce production cuts at the next meeting (October 5) to support oil prices.

In addition, the recent new round of speeches by Fed officials also contains mysteries. While the Minneapolis, Chicago and St. Louis Fed presidents all expressed their respective commitments to fighting inflation, two of them conveyed concerns about "fighting too much." Other officials reiterated that the FOMC is tracking and considering the impact of a strong dollar on the economy, while suggesting that the 4.5% federal funds rate may be the Fed's highest level and that the FOMC may remain there for some time.

Technology Outlook

From a technical standpoint, bears have the major advantage after the Dow hit a new low for the year. Considering that there are almost no major changes in the fundamentals, it is expected that any subsequent potential rebound may be limited. As long as the rebound does not break through 2960, it will still be mainly bearish, and the lower support is at 28600-27100.

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Looking ahead, the market will usher in the Fed's preferred inflation measure - PCE data on Friday. The annual rate of PCE in the United States in July slowed to 6.3% from 6.8% in June. Focusing on the data in August to confirm whether the inflection point has come will have an impact on the pace of the Fed’s later rate hikes.