US Equities: More Seasonal Weakness to Follow?

U.S. equities have recently entered a period of seasonal vulnerability, following a robust start to the year. The most notable downturn has been witnessed in the tech-heavy Nasdaq index, which has incurred a decline exceeding 10%, thus entering correction territory. This prevailing selloff has been catalyzed by renewed concerns regarding inflationary pressures, as evidenced by crude oil prices surpassing the $95 per barrel mark and the 10-year Treasury yield surging beyond 4.5%, representing its highest level since the Great Financial Crisis of 2007.

Oil Prices: Surge On Supply Concerns

Brent Crude Futures have experienced a notable upswing, reaching their zenith for the year 2023. This surge follows a substantial reduction in U.S. crude oil inventories, compounding apprehensions concerning global supply constraints. Government data revealed a decline of 2.2 million barrels in U.S. crude stocks during the past week, resulting in an inventory total of 416.3 million barrels. This stark reduction markedly exceeded the expectations of analysts, who had anticipated a more modest decline of 320,000 barrels, as indicated by a Reuters poll. Concerns have been kindled regarding the quality of the remaining oil reserves and the potential for falling below minimum operational levels. These concerns are rooted in the backdrop of apprehensions regarding tight supplies as the winter season approaches, precipitated by production curtailments of 1.3 million barrels per day, enforced by Saudi Arabia and Russia until year-end.

Crude Oil Prices Haven Risen Significantly

Interest Rates: ‘Higher For Longer’

The annual inflation rate in the United States has sustained its upward trajectory for a consecutive month, reaching 3.7% in August, compared to 3.2% in July. This exceeds the consensus forecast of 3.6%, driven in part by the recent escalation in oil prices. Coupled with base effects stemming from the previous year, these factors have contributed to the inflationary surge. During its September FOMC meeting, the Federal Reserve opted to maintain interest rates at their current levels while signalling an expectation of one additional rate hike before year-end. Moreover, the Fed indicated fewer cuts in the coming year than previously anticipated, as indicated by the central bank's projections released following its two-day meeting.

Hedge Funds Have Been Short US Treasuries

In response to these developments, U.S. Treasury yields have exhibited a notable surge beyond the 4.5% threshold. Hedge funds, notably, have amplified their short positions in U.S. Treasuries. Prominent investor Bill Ackman, CEO of Pershing Square, has publicly disclosed his position of betting against 30-year U.S. Treasuries as a hedge against the potential ramifications of sustained 3% inflation. Ackman has cited multiple factors underpinning this decision, including the growing desire of nations such as China to reduce financial interdependence with the U.S., mounting concerns regarding U.S. governance, fiscal responsibility, and political polarization.

Higher Interest Rates: Bane For US Equities

The ascent in U.S. Treasury yields has precipitated the equity market selloff, particularly impacting interest-sensitive technology stocks. Notably, the $Invesco QQQ Trust-ETF(QQQ)$ , a widely followed tech-focused exchange-traded fund (ETF), currently hovers near a crucial support level following its recent downturn. There have been emerging indications of vulnerabilities within the prominent tech giants, suggesting that the rally of the so-called 'magnificent seven' may be approaching its conclusion. $Apple(AAPL)$ has recently faced performance challenges, compounded by investment firm UBS reporting "mixed at best" initial demand for the iPhone 15 line. This development has exerted downward pressure on chip manufacturers and suppliers, such as $Taiwan Semiconductor Manufacturing(TSM)$ and $ASML Holding NV(ASML)$.

AAPL Daily Chart

The weakness observed in Apple's stock price is anticipated to persist, potentially leading to a decline to the 50% Fibonacci level of support. Given the high degree of correlation between Apple's performance and that of the S&P 500, this is expected to weigh on the broader index. Consequently, it is foreseen that the S&P 500 will continue to undergo a selloff, possibly testing the 4200 level of support.

SPY Daily Chart

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