Where we are: S&P 500 futures are up around 0.4% as we head into the New York open, holding onto gains from the previous session. The index is attempting to consolidate above 5300 after a volatile week, supported by strength in the tech sector. This level puts it comfortably above yesterday’s close, signalling a continuation of the risk-on sentiment.
What’s driving it: Despite strong earnings from some sectors, the main headwind for the S&P 500 remains persistent inflation concerns. Yesterday’s moves in the Treasury market saw the 2-year yield fall 9bp to 4.04% and the 10-year yield drop 10bp to 4.57%, but the market still expects elevated long-term yields, signalling fears that the Fed may need to maintain its restrictive monetary policy stance for longer than anticipated. The dip in real yields is providing a tailwind for gold, but also speaks to latent stagflationary anxiety. Cross-market drivers include the ongoing uncertainty surrounding the Iran war, which has propped up oil prices (WTI at $112.25), adding further inflationary pressure.
- The 10-year breakeven inflation rate fell 5bp to 2.39%, highlighting market sensitivity to inflation expectations.
- Speculator positioning in S&P 500 futures remains modestly short, with net non-commercial positions at -138,905 contracts, leaving the index vulnerable to a short squeeze if positive catalysts emerge.
- The Zweig-DiMenna model warns of rising inflation in the next 3-6 months and that bond yields have not risen enough to compensate, suggesting potential downside for equities.
NY session focus: All eyes will be on the Revised UoM Consumer Sentiment release at 10:00 ET, where any deviation from the expected 48.2 print could trigger a significant market reaction. A stronger number could reinforce the “higher for longer” narrative, putting downward pressure on the S&P 500, while a weaker reading might offer a temporary boost. Key levels to watch are 5320 as resistance and 5280 as immediate support. The long tech trade, particularly in AI-related names like Nvidia and Lenovo, continues to work, but is vulnerable to profit-taking. The pain trade for the S&P 500 is a surprise dovish pivot from the Fed combined with a ceasefire in the Middle East, unleashing pent-up risk appetite and squeezing short positions.