Investors can expect high uncertainty

WITH the bulk of mega-cap earnings out of the way, the S&P500 (SPX) has lost some of its momentum seen earlier in November, taking a pause after breaking a series of all-time highs back then.

Looking at the charts, things remain bullish for the S&P500. As of early November, the benchmark US equity index has broken back above the year-long bull market trend line - at around 4,580 points, and as at the time of writing, looks set to stage its first test of the aforementioned trend line as a level of support.

The key price levels to watch for the upcoming weeks should be derived from the trend line and a successful test of the 4,650-4,680 price region should see the SPX's upward trend continue as before.

On the other hand, a break below the trend line should see the SPX test the 7-week Exponential Moving Average (EMA) at around the 4,600 price level. The 7-week EMA has acted as a level of support for the SPX over the past year, and a successful test of that level could act as a possible entry level for a long-term strategy.

Look out for volatility

Five-year break-evens (measuring expected average price increases over the next 5 years) and 5-year forward break-evens (measuring the same for the following 5 years) are remaining stable at around 2.2 per cent. This means that the market still largely feels that longer-term inflationary pressures will not be significantly higher in the future.

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From this, we can infer that many market participants are confident that the Federal Reserve will be able to rein in overly high price spikes going into the future, which should firstly temper expectations of a panicked flight into inflation hedges.

However, keeping in mind how both the European Central Bank and the Federal Reserve have both acknowledged in recent months that inflation appears not to be as temporary as initially expected, there is still room for that narrative to be revised.

Overall, there remains several possible scenarios that may shock price levels such as from the US reaching full employment levels, further disruption in global supply chains and spiking commodity prices as global industrial production and consumption accelerate past pre-pandemic levels.

Rate hike expectations also likely to see revisions

While the market still does not believe that inflation will remain high in the medium-to-long term, rate-hike bets for 2022 have been ratcheting up.

Investors should expect high uncertainty as the push-pull dynamic between the market and the Federal Reserve continues. While Fed officials mentioned earlier that perhaps 1 rate hike should be expected in 2022, those expectations appear to have moved to 2 rate hikes - with the first hike expected for June 2022.

With October's reading for personal consumption expenditure (PCE) already coming in at a 30-year high, the timeline for accelerating and increasing the number of rate hikes in 2022 is likely still subjected to hawkish (tightening) changes.

Fast taper vs slow taper

With October's job data coming in at pandemic era lows (initial jobless claims came in at a 5-decade low) and PCE coming in at 30-year highs, the Fed should have its ammunition to justify a faster taper.

Current taper expectations stand at a complete reduction in asset purchases by end-Q2 2022, but that schedule may be accelerated to end-Q1 2022 instead; a significant acceleration in the taper timeline.

Should the taper timeline be accelerated, this will likely provide a major point of weakness across equities globally; particularly in markets outside of the US.

Ultimately, US investors are justifying the need for a faster taper in the face of rising prices as well as red-hot economic growth, a mix that will likely tilt US equities to become more attractive than equities elsewhere as the increase in corporate earnings and overall economic growth will be expected to overcome the twin forces of tighter monetary policy and inflation.

• The writer is an investment analyst at Phillip Futures

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

• For further reference, visit stocksBnB.com