Technical Analyst, Saxo Bank
Summary: Equities and fixed income could face a tough Q4. Can US dollar positions provide some upside in the cold winter?
Things have not evolved as quickly as anticipated in my Q3 Outlook on US 10-year Treasury yields. However, the picture remains the same and is still very important to discuss.
A short recap: US 10-year Treasury yields broke a multi-decade-long downtrend with a confirmed uptrend when yields broke above 1.71 percent in January 2022, marking a new higher high. This was followed by a break of the multi-decade-long falling trend line in March.
In June yields broke above the 2018 peak at 3.26 percent and spiked at 3.50 percent, only to be hit by a correction.
That correction seems to be over, and US 10-year Treasury yields are likely set for higher levels. With just the psychological resistance at 4 percent, yields could very well reach the 1.382 Fibonacci projection at around 4.38 percent in Q4. However, there is no strong resistance until around 5.25 percent, which is around the pre-subprime peak between the 1.618 and the 1.764 Fibonacci projection levels from the 2018–2020 downtrend.
S&P 500 was rejected at the medium-term falling trend line a few weeks ago just below the 0.618 Fibonacci retracement at 4,367 and just below the 55 Simple Moving Average, which is declining, indicating an underlying bearish sentiment.
Key resistance level is at 4,325. If S&P 500 closes above the falling trend line and above 4,325 the bearish picture has reversed, and the leading US index will push for levels around 4,600 and possibly all-time highs.
The trend is down on the medium term but bulls don’t give up without a fight. If they can’t hold S&P 500 above 3,886, US equities are likely in for a rough Q4.
Depending on how the market reacts to the October earnings season, the first month of Q4 can be become ugly. If S&P 500 closes below 3,886 June lows around 3,636 are likely to be taken out and a 3,500-3,200 consolidation area could be reached in Q4.
3,503 is the 0.50 Fibonacci retracement of the 2020–2022 bull market and 3,200 is close to the 0.618 retracement level (3,195 to be exact). It is also the 0.382 retracement of the 2009 (end of subprime crisis bear market) through to the 2002 peak bull market.
There is still massive divergence on RSI that needs to be traded out. That can be done by either a higher high on both RSI and the Index, or by an RSI close below the 40 threshold. For RSI to drop below 40 and reset/trade out the divergence, lower levels on the S&P 500 are needed.
The past 18 months of downtrend in EURUSD paused at parity and in the middle of the wide falling channel it has been trading in the past ten years.
Just as most market participants thought that it was the last time in a very long time we were to see the euro being stronger than the dollar, the euro has bounced back strongly.
However, it was time for a correction after almost 18 months in one direction. A correction could take EURUSD to around 1.0350 resistance.
The downtrend is likely to resume in Q4 and the parity and consolidation areas are likely to be tested once again—this time they’re likely to be taken out. The consolidation area was “founded” back in 2002 just before an almost decade-long bull move in EURUSD.
If parity is broken again, EURUSD is likely to drop swiftly to the lower level of the consolidation area, around 0.96.
However, 0.96 is not a strong support level and if EURUSD moves below the middle of the wide channel trendline, selling pressure could accelerate and push EURUSD to 0.90.
0.90 is the 1.618 Fibonacci projection level of the 2020–2022 up-and-down trend. Parity is at the 1.382 projection and 0.90 is close to the 2.00 projection.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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