S&P 500 weekly report: Trump's tariff threats stoke market uncertainty

Trump's tariff threats stoke market uncertainty

Fresh threats from US president-elect Donald Trump to hike tariffs on China, Mexico and Canada have sent shockwaves to the risk environment into the new week, as markets now grapple with the uncertainty over whether more countries could also be in Trump’s crosshair ahead. Floating the tariffs as “one of his many first executive orders” suggest that trade restrictions may come much earlier than expected, although there are still much ambiguity over his recent statement.

A 25% tariffs on goods from Canada and Mexico seems more aggressive than the initial 20% blanket tariff mentioned, while an additional 10% tariff on Chinese imports seem to mark a step-down from his previous 60% tariffs threat on China, which may partly explain the resilience in Chinese equities today. If anything, his statement seems to offer more confusion for markets, with the US dollar paring earlier gains while Asian indices consolidate after an initial dip.

The economic data front will leave US core Personal Consumption Expenditures (PCE) price index on watch ahead, and with market rate expectations for December very much split, the data will be on watch to potentially drive some consensus.

What to expect for US core PCE price index this week?

The previous September read for headline PCE came in line with the 2.1% forecast, following a 2.3% advance in August. However, the core PCE was higher than expected, rising 2.7% versus the 2.6% consensus. The recent uptick in core PCE marks its first since August 2023, indicating that the last-mile inflation fight remains an arduous one.

Ahead, expectations are for US October core PCE to inch up to 2.8% from the 2.7% prior, while headline PCE may tick higher to 2.3% from previous 2.1%. Month-on-month, headline and core PCE are expected to remain unchanged, growing 0.2% and 0.3% respectively.

Another higher-than-expected read is likely to renew concerns around sticky inflation and see rate expectations lean further towards a potential rate hold from the Federal Reserve (Fed) as soon as the December meeting. One to note that the current core PCE read of 2.7% is already above the Fed’s 2024 year-end projection of 2.6%, so another lack of inflation progress will not justify further easing. Currently, the rates markets are pricing a 25 bp rate cut from the Fed in December at almost a coin flip (55% probability), which will leave sentiments highly sensitive to the inflation data to find a common ground.

Source: Refinitiv

S&P 500: Eyeing for new record high

Despite facing some resistance at the key psychological 6,000 level, retracement in the S&P 500 has been short-lived, as buyers were quick to step in at the 5,861 level to push for a new higher low. The index may continue to eye for a fresh record high ahead, with its daily relative strength index (RSI) pointing to a near-term upward bias in place, having defended its key mid-line last week.

While growth stocks have been lagging over the past week, we believe that there may be room for more upside in the S&P 500, as other less rate-sensitive sectors play catch-up. The financial sector has moved to be the top-performing sector year-to-date, with utilities and industrial sectors following closely behind.

US economic surprises at its highest level since April this year help to support soft landing hopes, while any form of trade restrictions out of the US will impact other trade-dependent regions to a larger extent, which may continue to see markets eyeing the US economy as the more resilient one. Ahead, any move to a fresh record high may leave the 6,168 level on watch next, where an upper channel resistance stands.

Levels:

R2: 6,168
R1: 6,000

S1: 5,861
S2: 5,674

Source: IG charts

Sector performance

Sector performance over the past week showed a rotation from growth into value, as outperforming sectors revolved around industrials (+3.3%), materials (+3.2%) and real estate (+3.1%), while technology (+1.0%), consumer discretionary (+1.7%) and communication services (-0.6%) lagged. Rising Treasury yields have been a key factor, which drove traction away from more rate-sensitive growth stocks with relatively higher valuation, as the recent run in US economic data continues to validate a more gradual Fed’s easing process. On a year-to-date basis, it seems that there are room for more gains in value stocks, as we expect more dovish Fed rhetoric to surface at the next meeting to set the stage for a potential rate hold into 2025. Over the past week, megacap tech stocks have been trailing in performance despite resilient earnings, which may reflect a prolonged rotation in play.

Source: Refinitiv

Source: Refinitiv

Source: Refinitiv
*Note: The data is from 19th – 25th November 2024.

Source: Refinitiv
*Note: The data is from 19th – 25th November 2024.

Source: Refinitiv
*Note: The data is from 19th – 25th November 2024.