S&P 500 falls back under 4550, eyes test of recent lows neer 4500 as Brainard signals “rapid” QT from May

• US equities reversed lower on Monday as traders weighed escalating sanctions and hawkish Fed speak.
• The S&P 500 was last down 0.8%, the Nasdaq 100 lost nearly 2.0% as US yields hit fresh multi-year highs.

US equities reversed lower on Monday, weighed initially by the prospect of tougher US/EU sanctions against Russia, but then with losses exaccerbated shortly after the US market open following hawkish remarks from Fed Vice Chair Lael Brainard. Brainard said that the Fed would begin reducing its balance sheet at a “rapid” pace as soon as May, implying the Fed might actively sell bonds, rather than just letting them roll off the balance sheet.

Traders have thus been upping their bets that the Fed tightens monetary policy conditions more aggressively and this sent yields across the US curve lurching to multi-year highs, delivering a blow to equity market valuations. The S&P 500 was last trading down about 0.8%, more than reversing Monday’s gains to fall back beneath the 4550 mark. Bears will be eyeing a test of last week’s lows just above 4500.

The yield-sensitive tech/growth stock-heavy Nasdaq 100 index fell closer to 2.0% and, in doing so, has also handed back all of Monday’s gains that saw the index close pretty much bang on its 200-Day Moving Average in the 15,150 area. The Nasdaq 100’s ongoing struggle to push and hold above its 200DMA is not a good sign for the bulls. In an environment where the Fed looks on the verge of accelerating its monetary tightening timeline quite aggressively, and one where yields are as a result trading with an upside bias, this shouldn’t be too surprising.

The Dow Jones Industrial Average, which is much more heavily weighted towards cyclical and value stocks that maintain a positive (or less strongly negative) correlation to yields, was last trading down a more modest 0.5%. Still, as is the case with the Nasdaq 100, the index also continues to struggle to break/hold back above its 200DMA, which currently resides pretty much bang on 35,000. The index was last trading near 34,750.

A solid ISM Services PMI survey release for March did little to lift the mood for equity markets, which are probably more inclined to take good news (regarding the economy) as bad news given Fed hawkishness. Indeed, Brainard mentioned on Tuesday that she is keeping an eye out for signs of economic slowdown, so signs of the opposite would surely embolden the Fed to go harder regarding monetary tightening.

Looking ahead, geopolitics will of course remain a key focus for the rest of the week but traders should also note Wednesday’s Fed meeting minutes. Given the way things have gone recently, few would be surprised to see US yields and the US dollar rallying on yet another hawkish surprise. That means, for the Nasdaq 100 and Dow, breaking back above 200DMAs may remain a challenge.