Stock Market Rally Ends as Banks Experience Selloff

April 5, 2023

The stock market’s four-day rally came to a halt as banks experienced a selloff, which pulled down the Dow Jones Industrial Average by 0.6% and the S&P500 by 0.58% on Tuesday. This sudden dip in the market was mainly caused by a drop in major financial institutions such as Wells Fargo & Co. and Citigroup Inc., whose gauge fell by 2%. Even regional lenders like First Republic Bank and Zions Bancorporation didn’t fare well, declining by at least 4.8%.

In contrast to the banks, Treasury prices climbed higher as softer data on job openings led to increased bets that the Federal Reserve may soon conclude its tightening campaign. According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), vacancies at US employers decreased to the lowest level since May 2021. This news caused yields on two-year Treasury notes to fall by 14 basis points to approximately 3.8%. Swap contracts referencing Fed meeting dates lowered the odds of a quarter-point rate hike in May to just under 50%, down from about 60%.

In his annual letter to shareholders, JPMorgan Chase & Co.’s CEO Jamie Dimon warned that the effects of the recent US banking crisis, which caused market turbulence last month, will be felt for years. This gloomy forecast could be one of the reasons why investors chose to sell off bank shares. However, this doesn’t necessarily mean that the overall market will continue to decline in the long run.

Seven out of eleven sectors in S&P500 stayed in the negative territory, as four sectors dropped more than 1% on Tuesday, and Industrials tumbled with 2.25% for the day. This could be due to the news of the banking crisis, as well as other economic uncertainties. Meanwhile, the Nasdaq 100 fell 0.4%, and MSCI world index edged lower with a 0.2% loss on Tuesday.

Main Pairs Movement

On Tuesday, the value of the U.S. dollar dropped to its lowest point in two months due to disappointing economic data. This has led to speculation that the Federal Reserve may be close to the end of its efforts to tighten the economy. Meanwhile, other central banks are expected to raise interest rates to address inflationary pressures.

The DXY index fell below 101.5 after the release of weak JOLTs (Job Openings and Labor Turnover Survey) and Factory Orders data for February. As a result, the EURUSD pair rose by 0.50% and reached a daily high of 1.0973. The GBPUSD pair also climbed to its highest level since June, closing with a 0.70% gain for the day.

Gold prices saw a significant increase, rising by 1.80% on Tuesday due to the weakness of the U.S. dollar. The XAU/USD pair continued to rise following the release of poor U.S. macroeconomic data and eased concerns about central banks resuming aggressive monetary tightening. The pair increased by almost 1.9% during the first half of the American trading session and closed at $2020 on Tuesday.

Technical Analysis

EURUSD (4-Hour Chart)

Recent data from the United States has raised concerns about the labor market, as job openings reported in the JOLTs report dropped by 32,000 in February. This, along with the second consecutive month of declining Factory Orders, may indicate a cooling labor market. More data will be revealed later in the week with ADP Employment figures, Initial Jobless Claims, and the US Nonfarm Payrolls report. Investors are now expecting a possible pause in the tightening cycle of the US Fed at its May 2-3 meeting, with a 57% probability of a Fed pause.

The EUR/USD pair has risen above 1.0900 for the second consecutive day, reaching a daily high of 1.0973, supported by broad US Dollar weakness. The pair shows a triple bottom pattern on the daily chart, indicating a potential upward trend with a target of 1.1000. The next resistance levels to watch are 1.0973, 1.1000, and the year-to-date high at 1.1033. On the downside, support levels are at 1.0900 and the 20-day EMA at 1.0788. The EUR/USD pair remains bullish with further upside potential.

Resistance levels: 1.1000, 1.1034

Support levels: 1.0900, 1.0788

XAUUSD (4-Hour Chart)

As of Tuesday’s European session, the price of gold is experiencing slight losses at around $1,980, consolidating the losses from the beginning of the week. The precious metal has been negatively affected by the recent strengthening of the US Dollar and a pessimistic geopolitical headline during a sluggish Asian session. However, the price rallied earlier in the day and touched its highest level in over a year above $2,025 after the release of disappointing US Factory Orders and US JOLTS Job Openings in February. The US Dollar Index is experiencing slight gains around 102.20 after a significant fall on Monday, the largest since March 22. Looking ahead, Gold traders may be interested in the US Factory Orders for February, which are expected to be -0.5% compared to -1.6% previously.

The recent drop in Gold prices from a descending resistance line, hovering around $1,990, could result in further decline towards the $1,968 level. If the price falls below this level, it could reach $1,930 and $1,900. However, a rise above $1,990 is necessary to confirm the buyers’ control. Although the $2,000 level and an upward-sloping resistance line at $2,027 could be a significant challenge for the Gold bulls. Nonetheless, Gold prices are expected to stay stable in the long run, but a short-term pullback cannot be dismissed. The RSI sits at 67.

Resistance: 1996, 2027, 2050

Support: 1960, 1950, 1937

Economic Data