Inside Markets — Downward Pressure

US equities will continue to take direction from bond yields with expectations for downside in 5-year yields to steepen the curve and provide near-term support for equity markets.  Momentum divergence signals late last week favor a trend reversal and this week’s economic calendar has the potential to drive 5-year yields from 4.42% to a near-term target near 4.14%.  The expected counter-trend rally in prices should pressure 10-year yields from the current 4.21% to technical support levels near 4.09%. The combined effect would result in 5/10 curve steepening from -21bp today to something around -5bp.

Near-term curve steepening should provide support for the S&P 500 (SPX) but expectations for the curve to remain inverted will likely contain rally attempts amid challenging seasonal conditions during the month of September.  Last week, the SPX bounced above support near 4300 with near-term resistance in the 4460-4525 range. Short-term market momentum turned bearish on August 16 and will remain bearish at levels below 4525. Rally attempts that fail to break above that level could threaten key support in the 4200 area in coming weeks.

Gold, copper, crude oil and most agricultural commodities are now pulling back from key resistance levels. The failure to break higher likely signals a weakening global economy.

A weakening global economy combined with the Fed’s pledge to maintain rates at high levels should put downward pressures on inflation and, importantly asset prices.  The next few weeks should prove critical in determining the size of pullback and we remain optimistic that the SPX can maintain levels above 4200.