S&P 500 collapses on Evergrande risks ahead of FOMC, airline stock outlook brightens
S&P 500 OUTLOOK:
- S&P 500 collapses amid concerns over possible Evergrande default and financial contagion
- Uncertainty over the Fed’s monetary policy normalization roadmap ahead of this week’s FOMC decision also weighs on sentiment
- Despite the growing risks to the market, there are still some bright spots. For example, airline stocks are starting to look attractive and may offer asymmetric upside potential
Most read: Stocks strike as Evergrande risk begins to spread
US stocks fell sharply earlier in the week, after similar declines overseas amid widespread bearish sentiment triggered by concerns of a collapse of Evergrande, one of the largest in China goods developers and would be the most indebted real estate company in the world with more than $ 300 billion in liabilities.
At market close, the S&P 500 fell 1.7% to 4,357 while the Dow Jones beat 1.8% to 33,970. Meanwhile, the Nasdaq 100 also suffered heavy losses, tumble 2.1% to 15,012 like nervous chief investored for the exits and increased demand for safe-haven assets (eg, US Treasuries).
Wall Street fears that a default in besieged Asian society could spill over into the housing market in the region, hurt him ready sector, undermine confidence and harm the Chinese economy, triggering a major financial crisis. While the Chinese authorities are unlikely to end up letting the situation get out of hand, their lack of response and public assurances are certainly causing anxiety and depressing risk appetite.
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At the same time, uncertainty over the direction of US monetary policy ahead of the FOMC meeting appears to be strengthening the defensive mood, in the middle of extreme complacency and frothy valuations, at a time when the The S&P 500 had not experienced a significant 5% decline or more in almost 12 months.
On Wednesday, the Federal Reserve will announce its September policy decision. No interest rate changes is expected, but the bank may provide “advance notice” that the process to reduce the pace of asset purchases will begin soon.
Given that As the central bank has heavily choreographed its intention to start phasing out quantitative easing this year, attention should shift to the dot plot, especially as the institution prepares to introduce 2024 projections.
Given that a rising choir of policymakers are concerned about the trajectory of inflation, judging from the recent airwaves story, it would not be surprising that some members moved their points higher and penciled in a tighter monetary policy for the next three years (for reference, if only two Fed members had to go up their points for 2022, the median expectation for that year would increase).
A warmongering surprise in the dot-plot diagram could raise US Treasury yields and weigh on rate-sensitive tech companies with high valuations. This, in turn, could trigger a S&P 500 decline due to its strong technology–oriented composition.
Despite the risk of greater decline or at least some short-term underperformance of the S&P 500, there may still be good opportunities, but investors will need to be more selective when building their portfolios. However, the transport sector, in particular the the airline industry looks attractive and offers a convincing risk / return profile in the medium term.
From March / April, airline actions prices have been hit by the increase in COVID-19 cases and low travel demand. However, with fears for the delta–the reduction in variants and the number of coronavirus infections decrease as vaccination progresses, the Of the industry the recovery could accelerate, especially as the Biden administration prepares to revoke its travel ban on visitors from 33 countries in November (the White House announced it would lift travel restrictions for foreigners visitors who are fully vaccinated may be the reason why some airlines are trading higher despite the general weakness in the stock market).
loose travel restrictions will increase revenue and help many airlines achieve profitability in the coming quarters as many commercial carriers with many international flights derive about a third of their income from these routes. Improving outlook for the travel segment means that sold names such as American Airlines (AAL), Delta Airlines (DAL), Southwest Airlines (LUV) and United Airlines Holdings (UAL) can take the lead and order medium term strength. To avoid the risks for the company that may arise from poor management performance, the the bullish thesis for air transport can be addressed via the EFT JETS (this is a passively managed ETF that gives traders / investors access to the global airline industry including airline operators and manufacturers).
JETS TECHNICAL ANALYSIS
Looking at the JETS daily chart, resistance can be seen at 23.15, near a short term descending trendline in play since late July. If buyers push prices above this level, buying momentum could gain momentum and pave the way for a move towards 24.13, a technical barrier created by the 38.2% Fibonacci retracement. the decline in March / July. Finally, a rise above 24.13 could expose the 24.75 mark.
On the downside, the first support to consider is in the psychological 22.00 region. If that floor is invalidated, the bears could reaffirm the selling pressure and drive the JETS ETF towards its 2021 low in the 21.15 area.
JETS TECHNICAL SHEET
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— Written by Diego Colman, DailyFX Market Strategist