The trade: could tariff tensions and faltering tech stocks trigger a broader market correction?

(AI video summary)

This video was created on 26 February for IG audiences by ausbiz.

US consumer weakness raises market concerns

Risk-off sentiment is dominating markets amid escalating tariff discussions and worrying signs of United States (US) consumer retrenchment.

"There's a lot of reasons for it," explains Tony Sycamore from IG. "There is certainly uncertainty out there because of the tariffs and the trade policy which the new administration is pushing. But more importantly, and potentially a result of what we just mentioned, is that we're seeing some signs of real retrenchment in the consumer sector."

Recent economic data has reinforced these concerns. A soft retail sales number, weak University of Michigan consumer sentiment, and a significant drop in the Conference Board's consumer sentiment index – the largest decline since September 2021 – all point to deteriorating consumer confidence.

"On top of that, we've had the biggest retailer in the US, Walmart, talking about the fact that it is a very challenging environment," notes Sycamore. "The US consumer accounts for 70% of Gross Domestic Product (GDP), they're very concerned, wary, cautious, and keeping their wallet in the back pocket."

Tech stocks showing vulnerability

The technology sector appears particularly vulnerable as concerns about Artificial Intelligence (AI) expenditure and potential budget cuts grow.

The US Tech 100 pushed to a marginal new high last week but couldn't maintain momentum, closing back below its previous eight-week trading range. Both the US Tech 100 and the US 500, heavily influenced by technology stocks, are now trading toward the bottom of this range.

"I think the US Tech 100 does have further to go in terms of potentially trading down towards that 200-day moving average and the uptrend support, which goes all the way back until December 2022," says Sycamore. "That comes in around 20,000. So I'm looking for further declines for the US Tech 100."

With Nvidia's earnings report due tomorrow, investors are watching closely for potential market direction. "They don't have a habit of disappointing. So maybe a little bit of a bounce for tomorrow. But if it doesn't come tomorrow, then we have those downside levels to keep in mind."

Gold experiences profit-taking

Gold has seen some profit-taking after an impressive eight-week winning streak, approaching resistance around $3000.

"This is a situation where you cut your winners to pay for your losers, and there's plenty of losers out there in the tech space," explains Sycamore. "We saw Tesla dropping over 8% overnight. It's now 40% below the high it hit back there in December."

With prominent tech stocks falling sharply, investors appear to be taking profits in gold, which has performed strongly but is now approaching the top of its trend channel.

Australian dollar holds key support

The AUD/USD has bounced to around 0.64, supported by robust labor market data and a cautious Reserve Bank of Australia (RBA) stance. However, Sycamore views this bounce as corrective rather than the start of a new trend.

"I see the bounce from that 0.6087 low in the Aussie as countertrend or corrective. But while it holds above support – and it held this level last night around 0.6320 – then you need to allow this corrective rally to continue."

With Australia's monthly Consumer Price Index (CPI) data due today, Sycamore notes: "It is just updating 60% of the basket there and mainly goods. So I don't expect it to play too much of a role in the Aussie dollar at this point of time."

The 200-day moving average sits around 0.6550, which could serve as resistance if the current rally continues.

Bitcoin breaks below trend support

Bitcoin has broken below significant trend support, with deteriorating risk sentiment and recent negative news weighing on the cryptocurrency.

A significant crypto hack last week appears to have provided the push needed for Bitcoin to break below its trendline support. Attention now turns to the 200-day moving average around $81,000, with further support between $75,000 and $65,000 if that level fails to hold.

"There's been a lot of people coming to this market at a very late stage, in terms of all the good news which came out after the US election, and they're probably now wondering what comes next," cautions Sycamore.

The recent price action suggests excessive enthusiasm may have carried the market too far too quickly. "Bitcoin and crypto, that's really a prime spot to see emotions get carried away. So this is something to be mindful of as well."