Stocks Under Pressure Amid Increasing Recession Fear

Weekly Wrap Content for the week of May 6:

1. Week 18 major indexes performance;

2. Week 18 US sector indexes performance;

3. Major indexes weekly charts of support and resistance levels;

U.S

For the week of 6 May, U.S. major indexes endured a fifth consecutive week of losses as interest rate and inflation worries continued to weigh on sentiment, especially toward growth stocks. The losses briefly pushed the Dow Jones Industrial Average(DJI) into correction territory, down more than 10% from its recent highs, where it joined the S&P 500(SPX) index. The Nasdaq Composite(Nasdaq) and the small-cap Russell 2000 Index ended the week firmly in bear markets, down more than 25%.

Markets were especially volatile late in the week, the Dow posted a 900-point gain on Wednesday, followed by a 1000-point drop the next day. Refer to major indexes’ weekly performance tables below.

Key highlights for the week and outlook:

1.    Interest rates. The Fed raised rates by 50 basis points (0.50%) in this week’s FOMC meeting, the first hike larger than 0.25% in 22 years. It is committed to following through on aggressive policy tightening in the coming months to catch up with the inflation curve. Likely same 50-basis-point rate hikes in the next two meetings, along with an active approach to reduce the size of the Fed's balance sheet. The market is currently pricing in about a 2.5% increase in the fed funds rate this year. 

2.    The market is pricing in a recession. Risks are rising but not guaranteed yet as evidence that economy expansion still ongoing. The week’s jobs report showed Apr payroll increased 428k, extending the streak of monthly job growth above 400k to 12 consecutive months. The unemployment rate held steady at 3.6%, just a tick above the half-century low. 

3.    Amid a broad rise in Treasury rates, the 10-year U.S. Treasury note yield breached 3.00% for the first time since late 2018, climbing as high as 3.13% on Friday. The yield curve is now pricing in significant rate hikes from the Fed this year. To the extent the Fed does not have to significantly up its rate-hike plans beyond current expectations (which will require inflation to start to moderate soon), expected the interest rates will be only move moderately from here. 

SPX sectors in play

Five out of 11 SPX sectors closed positive this week. Energy(XLE) and Financials(XLF)  stocks continues to outperform within the S&P 500. While Technolgy(XLK) and Consumer Discretionary(XLY) lagged. Refer to below sector indexes weekly performance table.

Technically bearish for all the three indexes as they recorded 5th week down in a row. Click below text for indexes weekly charts.

DJI weekly chart

SPX weekly chart

Nasdaq weekly chart

China/HK

China markets fell as Beijing showed no sign of relaxing its zero-tolerance approach to the coronavirus, raising worries about the economic cost of widespread lockdowns. The broad, capitalization-weighted Shanghai Composite Index(SSE weekly chart) fell 1.5%, just closed above it key psychological level 3,000.

Many of Shanghai’s 25 million residents remain under varying degrees of lockdown even though the city started to ease restrictions as infections have declined. Meanwhile, Beijing announced mass testing and increased restrictions in response to a growing outbreak. In a sign of how the virus restrictions have hit domestic consumption, spending over China’s five-day Labor Day holiday plummeted 43% from a year earlier to CNY 64.7 billion, or roughly USD 9.8 billion.

In economic news, China’s service sector activity shrank in April at the second-steepest rate on record, according to the latest Caixin services Purchasing Managers’ Index (PMI). Tensions with the U.S. remained elevated as the U.S. Securities and Exchange Commission (SEC) added over 80 U.S.-listed Chinese companies to its list of entities facing possible delisting from U.S. exchanges.

In another sign of growing tensions with the West, China has ordered central government agencies and state-backed companies to replace foreign-branded personal computers with domestic alternatives in two years, Bloomberg reported. The overhaul marks one of Beijing’s most aggressive moves to date to reduce the country’s reliance on U.S. technology.

Hang Seng index(.HSI weekly chart) slumped the most with 5.16% loss for this week on inflation jitters while China hardens zero-Covid stance. Alibaba, JD.com led tech rout as Hang Seng Tech Index tumbled 10 per cent in this week. Technically, the .HSI index just closed inches above its key psychological level 20,000.

Singapore

STI index (STI weeklychart) soldoff on Friday, gave up and closed below 3300 level it had held well over past two weeks. Further downside expected in short term if it cant rebound and stay above 3300 coming week. Weekly chart uptrend still intact but last candle(weekly) appears ugly. Next immediate support to watch is at 3250.