S&P 500 reverses Wednesday’s post-Fed gains, back under 4,200 as yield rally batters tech

• US equities have largely reversed Wednesday’s post-Fed rally, with big tech names leading the decline as yields surge.
• The S&P 500 recently fell back below the 4,200 level, taking its losses to more than 2.5% or 100 points.  

Wednesday’s post-Fed jubilation has proven short-lived, with all three of the major US equity indices having already given back the lion’s share of Wednesday’s gains not even two hours into the US trading session. Yes, Fed Chair Jerome Powell did rule out 75 bps rate hikes at upcoming meetings, easing some of the most acute fears about rapid near-term Fed tightening and, yes, this has knocked short-end US yields back from highs.

But the long end of the US yield curve is telling a hawkish story. The 10-year rallied more than 10 bps on Thursday to break above the 3.0% level for the first time since December 2018, while the 30-year yield was last up an even heftier 14 bps. Clearly, bond markets have interpreted Wednesday’s message from Powell as meaning signaling the risks are tilted towards a higher Fed terminal rate and equity markets are taking note.

The tech-heavy, highly long-term bond yield sensitive Nasdaq 100 index was last trading lower by close to 4.0% on the day near the 13,000 level, a sharp reversal back from Wednesday’s close above 13,500. The S&P 500, meanwhile, recently dipped back under 4,200 amid a 2.5% on the day decline and was last trading down over 100 points from Wednesday’s close bang on the 4,300 level. The Dow was last trading down a little under 2.0% in the 33,400 area, having reversed lower from a test of its 21 and 50-Day Moving Averages in the 34,070 area on Wednesday.

As markets continue to digest the implications of Wednesday’s Fed meeting, focus will begin shifting to the release of the official April US labour market report on Friday at 1330BST. With inflation risks in focus and a key driver of market sentiment right now (as higher inflation means a more hawkish Fed), traders will be closely scrutinising the report for signs of wage growth acceleration. If the data is interpreted as having any hawkish read across to the Fed, it could be an ugly end to the week for US equities.