Fed Policy Remains the Biggest Risk for Equity Markets

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A volatile first quarter for U.S. equities that struggled with not only anti-inflation-fighting Federal Reserve but also increased geopolitical tensions. The latter originated from Russia’s invasion of Ukraine. Later, the S&P 500 posted a quarterly loss of about 5%, while the market mindset shifted from “buying the dip bias” to “selling the rib”. Closing Q1, many of the factors that plagued stock markets will remain the main drivers in Q2. In addition, due to the increased geopolitical tensions prompting a significant supply in energy markets, with oil firmly above $ 100 / bbl, along with China’s induced supply disruptions, further risks will remain for inflation. As such, an already vibrant Federal Reserve in fighting inflationary pressures, look to add more haste to contain those additional risks and bring rates to neutral as quickly as possible. This spells another difficult period for a risky appetite, in which the prejudice remains a sale on ribs. That said, my view remains that the biggest risk to stock markets will continue to be Fed policy.

Figure 1. Q2 Range In-Play

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Source: Refinitive

On the downside, the key area targeted is 4100, which marks the panic on the day of the invasion of Russia. If this area were to be broken, there is a risk of a displacement of 3800. However, while I expect 4100 to hold, this is largely on the premise that there is no breach in peace negotiations between Russia and Ukraine. Meanwhile, upper resistance is located at 4600, where the February double top is located.

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