U.S. EQUITY OUTLOOK:
- The Nasdaq 100 plunges as tech stocks sell off
- Snap’s earnings warning spooked markets, prompting investors to cut exposure to social media companies
- Weak US economic data exacerbates negative sentiment
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After a brief reprieve At the start of the week, US technology stocks began to fall again on Tuesday, weighed down by a brutal sell-off in the social media universe. At the closing bell, the Nasdaq 100 plunged 2.2% to 11,769, a far cry from the session’s worst levels as it was poised to retest its 2022 lows.
Heavy downward pressure began last night after Snap, Snapchat’s parent company, posted worse than expected quarterly results and posted a negative profit warning, indicating that it would miss its own performance targets on the cooling of advertising revenues, attributing the setback to the deterioration of the macroeconomic environment. The warning has embroiled social media companies across the board fearing the slowdown in digital advertising will also affect their bottom line. As for the underperformers in the space, Snap fell 43%, pinterest in crater 23.64%Meta fell 7.62% and Twitter lost 5.5%.
The rout in equities was compounded by disappointing economic data in the United States. May manufacturing activity slowed, but the most worrying sign came from the services PMI, which recorded its weakest expansion in four months. To make matters worse, new home sales in April plunged 16.6%, a sign that the real estate segment is rapidly slowing amid soaring mortgage rates. These reports generated a strong risk aversion reaction on Wall Street, pushing up US bond prices and weighing on yields.
Going forward, the macroeconomic landscape becomes increasingly challenging for equities. Faced with soaring inflation, the Fed will need to continue raising borrowing costs in the coming months to restore price stability, even if it triggers a significant decline. Justified or not, many investors fear that the current tightening cycle embraced by policymakers could lead to a recession, a scenario that will certainly complicate the outlook for US companies and their earnings.
As for the economic calendar, Wall Street will focus on April durable goods orders and the FOMC minutes on Wednesday, but the highlight of the week will come Friday with the April PCE report. With US markets closed next Monday for the Memorial Day holiday and traders starting to leave thego offices for the long weekend, liquidity conditions could deteriorate further in the coming days. Thin liquidity could amplify price volatility if the main economic data surprise up or down compared to expectations.
NASDAQ 100 TECHNICAL ANALYSIS
The Nasdaq 100 resumed its relentless decline on Tuesday, but failed to retest 2022 lows near 11,492, a critical technical support area to watch. For sentiment to stop deteriorating and downside pressure to ease, this floor needs to hold, but if breached, focus would shift to November 2020 lows around 11,000. Aside, if the bearish buyers resurface and trigger a bounce, initial resistance appears at 12,250, followed by 12,600. In addition to strength, the next level of interest on the upside is located at 13,000.
NASDAQ 100 TECHNICAL CHART
NASDAQ 100 Technical chart prepared using TradingView
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—Written by Diego Colman, Market Strategist for DailyFX