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Daily Financial Insights: Why we think US equities could be at risk of pulling back

Daily Financial Insights: Why we think US equities could be at risk of pulling back

Jessica Amir
Market Strategist

Summary:  US equities could be at risk of pulling back, with warning signs flashing in bond markets. The Fed collects more ammunition to keep hiking but markets still expect rate cuts. We cover potential portfolio positioning. And why the Aussie dollar and Pound Sterling move in different directions.

US equities move up despite hotter-than-expected retail sales and CPI. Why we see risk of a potential pullback

Investors digested stronger than expected retail sales for January, rising 3% which is the biggest jump in about two years, with car purchases soaring, with overall sales beating expectations (of 2% rise). Core sales also beat expectations (up 2.6% vs 0.9% expected). The bottom line is that this is the second set of data out this week, that puts the Fed in a tricky situation, with stronger growth and stronger inflation. This underpins arguments that the Fed can keep rates higher for longer, even though the market thinks the Fed will cut rates later this year. Bond markets are waking up that, that markets could be in for a shock. So, yields are moving higher, with the US 10-year yield back at 3.803%, its highest level since early January - flagging the possibility of equity markets pulling back. 

On top of that, we are seeing S&P500 earnings squeezed - 75% of S&P500 companies who reported results so far, reported aggregate average earnings falls of 2.2% in the quarter (but that’s slightly better than expected). Although the S&P500(US500.I) moved up 0.3% and the Nasdaq 100 (USNAS100.I) gained 0.8% on Wednesday, we don’t want to get too complacent here. Traders may want to consider putting in portfolio protection or taking some profits off the table and topping up defensive positions such as bond exposure in case markets pull back. Naturally, the 4,100 level is a key level to watch on the downside for the S&P500. What else to consider: later this week, traders will listen to speeches from Fed officials, which could be a catalyst for equities.

Australia equities (ASXSP200.I) moved lower to one-month lows, weighted by CBA. Gold miners and coal companies' results ahead

Yesterday Commonwealth Bank, Australia’s largest lender, issued a cautious outlook as its customers are feeling ‘significant strain’. Its shares sank about 6%, falling from their record highs to $103, while also dragging down the broader Australian share market (ASXSP200.I). Australia’s biggest bank and lender reported disappointing profit results and guided for a challenging year ahead - putting aside more capital for bad debts, as higher price pressures continue to hurt consumers, along with falling home prices. Its net interest margin came in at 2.1%, which was on par with expectations, but its cash profit missed expectations, despite rising 8.6% YoY to $5.15 billion (vs $5.17 billion Bloomberg consensus). The big Bank announced a $1 billion share buy-back and consensus expects 2023 profits to hit another record, and for margins to improve – that’s good to know for long term investors. However, for potential traders, it’s worthwhile noting, yesterday CBA shares gapped down, meaning the market may fill that gap and buy the dip today or in coming days.

Today we will be watching NAB’s quarterly results as well as results from miners, coal giant Whitehaven Coal, and gold companies, Newcrest Mining and Evolution Mining with the market expecting strong results 

In FX: the Aussie dollar is wobbly ahead of AU employmentdata. Watching AUDUSD and AUDGBP

The Aussie dollar stumbled after Australia’s biggest bank flagged a weaker outlook ahead with consumers feeling strain. Still the AUDUSD pair – seems to be supported by the 50-day moving average, but if today’s employment report is stronger than expected, i.e., more than 20,000 jobs are added, then we will be watching resistance levels, at perhaps 0.7114 for the Aussie. On the downside, if Australian employment is weaker than expected, look for potential support at perhaps at 0.6879. Also consider watching copper and iron ore prices which could guide the AUDUSD. Also consider watching the AUDGBP after the UK received slightly softer than expected UK CPI, which allows the bank of England to sit on their hands for a little longer, while the RBA can keep hiking.


Click here to look at more stocks to watch across the metals sector this week.
For our team's weekly look at markets, click here. 
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