March 7, 2022
Europe: Major European benchmarks closed well off worst levels today. Reports will focus on the Euro Stoxx 50 (SX5E) falling into technical bear market territory (down >20% from recent highs), but the 3512 close followed a significant intraday bounce off strong technical support in the 3,400-3,500 zone. Equity sentiment in Europe is even more bearish than the US sentiment when the S&P 500 (SPX) was testing 4,100. The daily bullish percentage today reached an all-time record low of just 5%. We respect the headlines, but also need to acknowledge some respect for strong technical support at 3,400 and day one of a possible two-day reversal into a base building phase.
US: Technical support for the S&P 500 (SPX) remains in the 4,100-4,300 range with the potential for a similar base building phase in the weeks/months ahead. The January correction looks like typical price discovery ahead of a policy tightening cycle. Thus far, Russia/Ukraine developments have only added realized equity market volatility with the VIX extending beyond January highs to 34.8 this morning. We recognize the significant headline risk, but with US equity sentiment also at bearish extremes, our technical base case is for range support to hold.
Bond yields: Ten-year yields have held technical support at the ~1.70% level thus far. The unwinding of bearish positions and low liquidity drove yields from the 2.05% level. The fundamental justification for current levels of ~1.75% would require significant cuts to recently trimmed +3.6% consensus US 2022 GDP estimates. Data tends to lag, but last week’s reports would have normally resulted in increased GDP estimates. For now, we stick with our year-end ’22 10-year yields target of 2.30%.