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‘Buy Everything’ Trade Taken Down A Notch

  • US futures pointing south, VIX at three-month high.
  • Fed’s bearish views may have curtailed risk appetite, for now.
  • Big Tech adopts cautious outlook.

The S&P 500 fell 2.57 percent on Wednesday, its biggest single-day drop since October, as the benchmark index wiped out its year-to-date gains. Spot Gold is now trading back below its 200-day simple moving average and even Bitcoin extended its descent towards the psychologicallyimportant $30,000 mark after shedding over a quarter of its value from its all-time high.

With the VIX index, also known as Wall Street’s “fear” gauge, now at its highest since the end of October, US stock futures are also pointing to further losses at Thursday’s open.

Fed plays down tapering talk

Fed chair Jerome Powell’s warning at last night’s FOMC meeting that the US economy is still “a long way from a full recovery” may have dampened some of the optimism baked into risk assets. Powell’s efforts to nullify concerns over an inflation overshoot, which would have likely hastened the Fed’s tapering of bond purchases also may have contributed to fund flows back into US Treasuries at the expense of riskier assets.10-year US Treasury yields are trading around the one percent line, their lowest levels in three weeks. At the time of writing, they have already moderated by some 18 basis points since their January high.

Meanwhile, the Dollar index (DXY) is now rising to test resistance at its 50-day moving average.

F.A.T. disappointment

The Wednesday selloff in the S&P 500 was led by declines in the technology sector and losses extended after hours as Big Tech signalled a cautious outlook in their earnings. Note that markets had already been concerned about overstretched valuations in the lead up to the current earnings season.

Facebook beat analyst estimates in its revenue and net income for Q4. Yet, the social media giant warned that it continues to face “significant uncertainty”, while citing the risk of heightened regulations in Europe and the high-case effect eroding year-on-year comparisons in the second half of 2021. Having shed 3.5 per cent during the regular session, Facebook’s share price tumbled by as much as 7.9 per cent in after hours trading although the stock has fought back since.

Despite Apple posting a record high for its quarterly revenue ($111.4 billion), the fact that company executives were reluctant to offer any guidance was enough to turn off some shareholders. Apple’s share price fell by more than 3 per cent in extended trading, after declining 0.77 per cent during Wednesday’s session.

Tesla disappointed investors with lower-than-expected figures for its top and bottom lines in Q4, even as the EV maker posted its first-ever full year profit while delivering nearly half a million cars. Despite outlining a bullish outlook, stating that it hopes to beat 2020’s growth rate of 50 per cent (which could translate into 750,000 units delivered in 2021), Tesla’s share prices still dropped by as much as 7.6 percent in late trading, having lost 2.1 per cent during the Wednesday session.

Setback for risk assets likely temporary

The overall narrative for stock bulls has not materially shifted, considering the prospects for more incoming US fiscal stimulus (albeit potentially delayed till mid-March), Powell’s reiteration of the Fed’s ultra-accommodative stance and the vaccine-enabled US economic recovery.

This cooling-off period may serve risk assets well and set them up for further gains down the line.

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