- US index futures rally on positive European earnings, but concerns linger over China’s slowdown.
- The approaching US presidential election could quickly change market dynamics.
- S&P 500 traders should prioritize risk management as potential volatility looms.
- Looking for actionable trade ideas to navigate the current market volatility? Unlock access to InvestingPro’s AI-selected stock winners for under $9 a month!
S&P 500 futures rebounded sharply alongside European markets in early European trade. A slew of positive earnings surprises in Europe coupled with Tesla’s blowout results overnight helped to soothe investor sentiment following a sharp decline on Wednesday.
Chinese markets, however, once again remained subdued overnight a day after some disappointing company earnings from the likes of Starbucks (NASDAQ:SBUX), L’Oreal (OTC:LRLCY), and Akzo Nobel (OTC:AKZOY) had all pointed to weaker demand in China. Those softer earnings had served as a warning that valuations for many companies reliant on China might be overstretched.
Today’s stronger results from several European listed companies have helped to offset those concerns, for now. Still, considering we are less than two weeks away from the US presidential election, a major risk event, nothing should be taken for granted.
With the US stock markets showing very little signs of concern even though the race to the White House is set to be a very close one this time, one could argue that investors might be too complacent.
Why have stocks remained supported until now?
One factor that is continuing to help keep stocks elevated is signs that central banks will continue to ease policy well into 2025 amid ongoing weakness in data.
This week, we saw a fresh rate cut by the People’s Bank of China, while the pace of Federal Reserve easing is expected to slow, with swap traders now less than 100% confident of rate cuts over the two remaining FOMC meetings this year.
Meanwhile, comments from European Central Bank officials have been on the dovish side, causing the EUR/USD to break the 1.0800 handle.
Today’s mixed European PMIs and their sub-indices all suggest that consumer inflation could fall further, thus allowing more rate cuts by the ECB.
Struggling China and Eurozone economies may weigh on risk appetite
While rate cut optimism has helped to drive markets in the US to repeated all-time highs, ongoing weakness in the Eurozone and Chinese economies, coupled with political uncertainty in the US – with the presidential election now less than two weeks away – all call for caution from here on.
At the very least, I am expecting a slowdown in the rally, but we could see a bit of a pullback too. China’s weak economy is casting a shadow over global corporate earnings and influencing commodity prices. Companies with significant exposure to China are feeling the pain of slowing consumer demand and rising costs, which could affect broader economic sentiment.
This was evidenced this week for example by Starbucks reporting that transactions fell in China by 14%. L’Oreal, a global beauty leader, also saw its North Asian sales drop by 6.5% in the third quarter, marking the fifth consecutive quarter of falling sales in the region. So, despite today’s rebound in US index futures, don’t take anything for granted as the markets could unravel later.
Attention shifts to the US presidential election
In the US, the "Trump trade" is picking up steam following recent opinion polls and odds trackers, which suggest an increasing chance of Trump winning the presidential election. While certain sectors of the stock markets and the US dollar have shown some strength in response, the overall stock market hasn’t experienced significant shifts yet.
Trump's protectionist policies could spell trouble for China and the Eurozone, in contrast to a potential Harris victory. If Trump’s chances continue to rise in the coming week, and other factors remain unchanged, we may see further weakening in those markets, which may apply some pressure on US indices, too.
S&P 500 technical analysis and trade ideas
The S&P bounced right off the bullish trend of what looks like a rising wedge pattern that it has been trading inside since markets started the recent rally in early August, as you can see on this S&P 500 futures chart:
Here, the 21-day exponential average and prior resistance around the 5800-5805 area offered additional support. This area is now going to be pivotal in determining the near-term direction. For as long as the index doesn’t break below here, the bulls will remain in control.
However, given the above-mentioned macro factors, a breakdown is now more likely in my view, in part because of profit-taking. Thus, should the 5800-5805 support area break down, then we could see a drop to at least around 5720-22, an area that was a resistance back in July and briefly in September before we broke higher. But if it gets there, why stop there? We could even see a larger drop once support levels start giving way.
On the upside, 5865 was being tested at the time of writing. This level was interim support on Monday and Tuesday before Wednesday’s breakdown. So, if the sellers want to regain control, this is precisely where they need to step in now. Else, a run to 5,900 could be on the cards.
What does it all mean for your trading?
Regardless of whether you are a bull or a bear, a buyer or a seller, it is important to pay closer attention to risk management in the coming days because of the potential for volatility to rise as we get nearer the election date. Take profit when markets make it available and move on to the next opportunities but stay nimble.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.