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Market Alert: FTSE 100 and S&P 500 in focus

Global stocks tumble – will key support levels hold?

It’s a sea of red this morning with the FTSE, DAX, Hang Seng and S&P 500 futures all down considerably in early trading.

There are multiple factors driving the global sell-off, but they all fall under one umbrella term ‘stagflation’…

Stagflation is the stuff of central bankers’ nightmares; it occurs during periods of high inflation and stagnating growth.

Taken separately, high inflation and stagnating growth can be dealt with by central banks through either raising interest rates to stem the former or increasing stimulus to boost the later. However, when inflation and stagnating growth occur at the same time it presents a dilemma for economic policy makers.

Supply bottlenecks, labour shortages, rising energy prices and monetary stimulus are all factors that have seen inflation levels rise sharply during the last year. Central bankers have been keen to stress that inflation will be ‘transitory’, but this stance is being tested as prices keep rising.

In terms of stagnating growth, markets have been spooked by a raft of weak economic data from China. Last week, Chinese retail sales grew at their slowest pace since August 2020 – missing analysts expectations, while industrial production also disappointed.

Traders will be watching closely this week as central bankers get to have their say on the stagflation debate. We have the Bank of Japan kicking things off on Tuesday, followed by the US Federal Reserve on Wednesday, and the Bank of England on Thursday.

Technicals

FTSE 100 – At the time of writing, the FTSE is testing a key zone of support created by the May and July swing lows. Traders should watch for signs of selling exhaustion at this support zone.

FTSE 100 Daily

S&P 500 – ‘Buy the dip’ has been a phenomenally profitable strategy on the S&P for the last two years. The recent dip has taken prices back to an area of support created by the ascending trendline and broken resistance / turned support. For the uptrend to continue looking pretty, this support level needs to hold.