Wall Street: US markets react to Middle East tensions and Q3 GDP forecast

Last week's downturn

US equity markets fell last week due to rising tensions in the Middle East and hotter-than-expected US economic data, which sent US yields surging to fresh highs. For the week, the Nasdaq lost 2.90%, the S&P 500 lost 2.39%, and the Dow Jones lost 543 points (-1.61%).

This morning, we are observing a repetition of last Monday's session as the market unwinds some of the safe-haven flows put on ahead of the weekend. US equity futures and US yields are higher, while the US dollar, crude oil, and gold prices have all eased.

The Monday anomaly

Despite the prevailing uncertainty, it's worth noting that Mondays have generally not been the days to short US equity futures, with the S&P 500 closing higher on 14 out of the last 15 Mondays since 3 July. A potentially positive session on Wall Street tonight could set the stage for a mid-week rally, followed by a cautious end to the week.

Turning to the calendar, it's a busy week in the US with Q3 GDP and Core PCE due for release, along with earnings reports from companies including Microsoft, Alphabet, GM, Meta, Amazon, Intel, UPS, Exxon, and Chevron.

What is expected from Q3 GDP

Date: Wednesday, 26 October at 11:30 pm AEDT

This quarter, the US economy has shown greater resilience than expected, exemplified by last week's stronger-than-anticipated retail sales and industrial production data for September.

This robust data has led to an upward revision ahead of Wednesday night's GDP release. The market anticipates a GDP growth of 4.3%, a significant jump from 2.1% in Q2. If the Federal Reserve is to maintain its current stance until year's end, a slowdown in Q4 will be necessary.

US GDP chart

S&P 500 technical analysis

During September, we projected that the S&P 500 would take another leg lower into the 4250/00 support region, marking the third and final wave of a correction from the July high.

While the initial rally in early October was encouraging and prompted us to adopt a positive view, the rally has since faded. The S&P 500 is now approaching the critical 4200 support area. This level must hold (on a closing basis); otherwise, we will shift to a neutral bias, given the increased likelihood of a deeper pullback towards approximately 3850.

S&P 500 daily chart

Nasdaq technical analysis

Much like the S&P 500, we noted in September that the Nasdaq lacked another leg lower as part of the correction initiated in July.

The pullback in the Nasdaq has thus far fallen short of the wave equality target in the 14,200 area. This leaves questions about whether the Nasdaq has completed its correction from the July high or still needs a final push lower towards 14,200 before resuming its uptrend.

What is certain is that if the Nasdaq can sustain a break above the downtrend resistance at 15,500—originating from the July high of 16,062—it will confirm that the correction is complete, and the uptrend will likely resume, targeting 16,500 by year-end.

Nasdaq daily chart

• _{TradingView: the figures stated are as of October 23, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}