STOCK MARKET OUTLOOK:
- The S&P 500 resumed its recovery on the back of weaker-than-expected PPI data, but finished the day off its best levels following reports that Russian missiles crossed into Poland
- The latest developments could dramatically increase geopolitical tensions in the region, dragging NATO into the conflict
- Geopolitics and U.S. retail sales data in focus on Wednesday
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After a soft start to the week, U.S. stocks advanced on Tuesday, resuming their recovery, bolstered by encouraging U.S. wholesale inflation results and retreating U.S. Treasury yields, but heightened geopolitical tensions capped the upside. After all the twists and turns of the trading session, the S&P 500 climbed 0.87% to 3,991, with the communications sector leading the push higher. For its part, the Nasdaq 100 outperformed its peers, rising 1.45% to 11,871, thanks to a jump in tech shares, such as Alphabet, Meta and Nvidia.
In terms of catalysts, October U.S. producer price index data for October boosted sentiment by providing further evidence that inflationary pressures are starting to ease faster than initially anticipated. According to the report, last month’s PPI climbed 0.2% m-o-m and 8.0% y-o-y, two-tenths of a percentage point below expectations, a positive development that reinforces the case for the Fed to slow the pace of interest rate hikes as early as its next meeting in December.
Although the mood was positive, traders adopted a more cautious stance in afternoon trading after news that stray Russian missiles hit Przewodow, a town in eastern Poland close to the Ukrainian border. According to media outlets, the strike killed two people, a situation that may aggravate the conflict in the region considering that Poland is a member of the North Atlantic Treaty Organization, a military alliance between 30 member states, including the United States.
The Russian Defense Ministry has denied all accusations, calling them a “deliberate provocation”, but Poland has not yet issued a detailed statement on the explosion. In any case, an attack on NATO territory is a significant escalation that may require a proportionate response. More details are likely to be known in the coming days, but geopolitics could limit risk appetite in the short term.
Looking ahead, all eyes will be on the latest U.S. retail sales survey due out on Wednesday. October receipts for retailers are seen increasing by 1% after flatlining in September, a sign that the American consumer remains resilient despite falling real incomes. For now, however, the weaker the report, the better for stocks as softening spending may translate into slower growth, paving the way for a less hawkish monetary policy stance.
The FOMC minutes from the November meeting, to be released tomorrow afternoon, will also get some attention, but they may not bring anything new to the table considering the amount of Fedspeak we have had in recent days.
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S&P 500 TECHNICAL ANALYSIS
The S&P 500 resumed its ascent on Tuesday, but failed short of breaking above the 4,000 level, a key Fibonacci resistance. For the near-term outlook to remain positive, we need a decisive move above that technical barrier in the coming days. If this scenario plays out, bulls could launch an attack on 200-day moving average, followed by trendline resistance near 4,125. On the flip side, if sellers regain control of the market and spark a bearish reversal, initial support appears at 3,900 and then 3,825.
S&P 500 TECHNICAL CHART
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—Written by Diego Colman, Market Strategist for DailyFX