The US stock market is in the red again. Tuesday's trading session was an absolute failure for the major US indices. DowJones (USA30) lost 3.1%. S & P500 (USA500) fell by 3.24%. USA500 registered the biggest drop in the last two months, offsetting its previous growth, which had also been the highest in the last 7 years.
The selloff in the US stock market was driven by the losses in the financial sector as a result of a decline in the US Treasury yields. US 10-year Treasuries plummeted by 6 basis points to 2.928% - their lowest since mid-September. Two-year bond yields, on the contrary, rose to 2.817%. As a result, the difference between 10-year and 2-year treasury yields reduced to the lowest in over a decade. It’s worth noting that when long-term treasuries fall faster than the short-term, it’s traditionally considered a sign of the upcoming recession. There is quite a chance that 2-year bond yield may be higher than the 10-year-old. For the past 50 years, every time this happened, the American economy went into recession. Worries about the future growth rates in the US dragged down the national stock market.
The comments by Federal Reserve Bank of New York President John Williams (NYSE:WMB), who said that he was onboard with more rate increases next year despite growing geopolitical risk, put additional pressure on the stock market. This statement followed the rhetoric of the Fed Chairman Jerome Powell last week, which earlier supported the stock market as it was interpreted a less aggressive trajectory of interest rate hikes. However, market participants quickly rethought Powell's words and concluded that the Fed will seek to raise interest rates past the neutral rate, which corresponds to the current level of unemployment. In other words, market expectations that the Fed will continue its tight monetary policy were another reason for pessimism in the national stock market. We remind you that the “tight” monetary policy has always negatively affected the US financial sector, leading to a decrease in the indexes and stocks.
Given the present fundamental background, the situation on the US stock market is likely to remain without changes until the end of this year. Moreover, the downtrend may grow stronger backed by the expectations of pessimistic news from the US labor market - the unemployment data is scheduled to be released this Friday. We recommend selling the DowJones (USA30) and S&P500 (USA500) indexes with targets at 24000 and 2600 respectively.
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