S&P 500 drops back below 4600, prints fresh monthly lows amid vaccine efficacy/hawkish Fed worries

• The S&P 500 dropped 1.3% on Monday and printed fresh monthly lows just in time for month-end.
• The downside was triggered by concerns over vaccine efficacy versus Omicron and hawkish Fed vibes.

US equity markets more than reversed Monday’s gains on what looks set to be a classic turnaround Tuesday, with the S&P 500 dropping back below 4600 to print fresh monthly lows in the 4570s. That marks a 1.8% drop for the index on the final trading day of the month and sets the S&P 500 on course to post a monthly loss of 0.6%. Technicians will be eyeing a test of resistance in the 4550 area.

In terms of the other major US indices; the tech-heavy Nasdaq 100 index is currently nursing losses of about 1.7% while the more value/cyclical stock exposed Dow is down 1.8%. In other words, the losses across US equity markets are pretty evenly/broadly spread. The CBOE S&P 500 Volatility Index, often referred to as the VIX or Wall Street’s fear guage, was up nearly 5 points to 27.70, only a few points below last Friday’s highs at 29.00.

Driving the downside

Driving the selling pressure on Tuesday was a duo of factors. Firstly, global equities (including US index futures) fell sharply towards the end of the Asia Pacific session on remarks from the CEO of Moderna that he expected the new Covid-19 variant to significantly erode vaccine efficacy. Despite numerous other vaccine makers, developers, scientists and public health authorities offering a more reassuring take that they still expect the vaccine to be fairly effective, the damage to sentiment was already done. The reaction to the comments made by the Moderna CEO demonstrates just how twitchy markets are right now to news regarding the new variant. Further information about the variant’s transmissibility, vaccine-escape capabilities and severity of symptoms caused will be important drivers of risk appetite in the weeks ahead.

The second factor to weigh on risk appetite on Wednesday was remarks by Fed Chair Jerome Powell, who testified before Congressional Committee on Banking, Housing, and Urban Affairs. Powell’s introductory statement at the hearing, which was released on Monday but largely ignored at the time, came across as bullish on the state of the economy (on growth, inflation and the labour market). This hawkishness, which (as mentioned) was initially ignored, was then built upon by Powell in the Q&A section of the hearing, with Powell saying that the word “transitory” should be retired as a description for inflationary pressures.

Meanwhile, while Powell did reemphasise that he expects inflationary pressures to moderate in mid-2022, he placed heavy emphasis on the fact that upside risks to inflation had grown and remarked that inflation was now a risk to the labour market. When pressed by Senators on the ongoing need for more monetary stimulus in light of underlying US economic strength and high inflation, Powell then revealed that he thought it might be appropriate to end QE purchases sooner. Acceleration of the Fed QE taper would be a topic of discussion at the 15 December FOMC meeting, he said.

Powell’s hawkish remarks triggered a sharp rally in short-end and real US bond yields, as well as upside in the US dollar. The upside in longer-term US yields was much more modest. Indeed, on the day nominal 30-year yields are down nearly 9bps, while the 30-year TIPS yield was down by a similar margin. As a result, US tech/duration-sensitive growth stocks have been “spared” from the kind of underperformance that would typically be seen if yields had risen across the board.