US stock index futures have slightly stabilized following a volatile week, as investors shifted back to safe haven assets like bonds, reevaluating their interest rate expectations. Poor Eurozone activity data has sent European indices downwards, stoking concerns that the central bank's aggressive monetary policy might steer the economy towards a recession.
S&P 500 futures have fallen by 0.3% while the NASDAQ has decreased by 0.2%. The Dow Jones Industrial Average has remained unchanged. It's clear that the Q2 equity rally is losing steam amid that looming rate hike threat and concerns that economies have yet to fully feel the impact of aggressive rate increases. This week, Fed Chair Jerome Powell suggested that an additional one or two rate hikes may be needed in 2023.
Investors are treading cautiously given the risk of a more adverse impact on the economy makes investors cautious about buying, even amidst the ongoing downward correction. It is clear that the economy hasn't fully reacted to the Fed's policy tightening, and today's PMI data, especially the ISM manufacturing index, an important gauge to watch. Negative data will trigger a new index sell-off, further pressuring the market at the end of the week.
European bond yields are on a downward trajectory following a bonds rally. German five-year bonds plunged by16 basis points to 2.48%, marking the biggest yield drop since April 2023. Yields on short-term US Treasury bonds also decreased amid ongoing rate hikes, with 10-year bonds losing 5 basis points.
According to S&P Global data, Germany's economic activity experienced an unexpected slowdown in June due to a slowdown in the service sector and persistent weakness in manufacturing activity. Separate data releases from France indicated that its economy likely contracted over the past three months. An analysis from Bank of America, citing global EPFR data, indicates a more bearish outlook for US stocks over the coming two months, as banks and real estate companies continue to anticipate an economic recession next year.
As for the technical picture of the S&P500, demand for the index is declining. Bulls still have a chance to continue the uptrend, but they will need to regain $4,383 and $4,416, from which the index might surge to $4,447. An equally important task will be maintaining control over the $4,488, which will reinforce the bull market. Should a risk-off mood lead to a downward move, bulls will need to act around $4,350. A break below this level will quickly push the trading instrument back to $4,320 and open the way to $4,290.
