Dow Jones, Nasdaq 100 Mixed Reaction to SVB Collapse Speaks to Strong Fed Pivot Bets

Dow Jones, Nasdaq 100, SVB Fallout, Fed Pivot – Asia Pacific Market Open:

• Dow Jones fell on Monday but the Nasdaq 100 rallied
• SVB fallout has markets strongly pricing in a Fed pivot
• The reaction does not yet speak of an impending recession
• Asia-Pacific markets vulnerable to volatility before CPI

Asia-Pacific Market Briefing – Markets Strongly Bet on the Fed Pivot

Global market volatility remained tense to start off the new trading week in the wake of last week’s failure of Silicon Valley Bank (SVB). On Wall Street, the Dow Jones fell 0.28% on Monday. But, the tech-heavy Nasdaq 100 rallied 0.45%. The FAANG Index (stocks of the 5 most prominent US tech companies) soared over 1%.

This market reaction comes despite efforts from the US government to shore up confidence in the banking system. These included fully paying off depositors in SVB and Signature Bank. Also, a new lending facility was created at the Federal Reserve where banks can be made eligible for loans if they pledge (mainly) Treasuries and mortgage-backed securities.

Despite these measures, investors heavily punished regional banks on Monday. Shares from Western Alliance (-47%) and First Republic (-62%) were a couple of the standouts. Meanwhile, traders heavily bought up Treasuries. The 2-year bond yield plummeted as markets quickly and rapidly repriced the Federal Reserve rate outlook.

At a first glance, the market reaction looks to be focusing more on the immediate implications of a potential Fed pivot. The US Dollar, the go-to haven, has been punished since Wednesday. Meanwhile, anti-fiat gold prices soared. This was the exact opposite reaction you saw from these instruments as we in the few months leading into the 2008 recession. Bitcoin soared on Monday.

As such, traders ought to proceed here with caution. Historically speaking, the bottoming of the yield curve (in this case, the spread between 10-year and 2-year rates) has been associated with preceding recessions. This spread soared a massive 54% on Monday (although it remains inverted). As a reminder, the 2-year rate topped in June 2006 before accelerating lower one year later. The recession was in Q3 08.

Looking toward Tuesday’s Asia-Pacific trading session, volatility remains a key risk for regional indices. There is a chance that markets will continue to focus on the Fed pivot. That may end up boosting stocks in certain sectors. But, keep in mind that in less than 24 hours, the next US inflation report crosses the wires. Another sticky print could further elevate market uncertainty.

Dow Jones Technical Analysis

The Dow Jones appears to be trading within the boundaries of a Descending Channel since the end of December. Prices recently tested the floor as well as the key 31738 – 32017 support zone. From here, a bounce would place the focus on the 50-day Simple Moving Average (SMA). Otherwise, breaking lower opens the door to extending the near-term downtrend.

Daily Chart

Chart Created in TradingView

Nasdaq 100 Technical Analysis

The Nasdaq 100 also appears to be trading within a Descending Channel. Prices tested the floor but closed above it. Also, the Nasdaq was unable to clear the 50-day SMA, establishing it as key support. Prices have been unable to break this SMA since the beginning of this month. A turn higher places the focus on the channel ceiling. Otherwise, extending losses exposes the 61.8% Fibonacci retracement level at 11717.

Daily Chart

Chart Created in TradingView

— Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

To contact Daniel, follow him on Twitter:@ddubrovskyFX