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  • US equities have seen selling pressure early in US trading hours for a second day running.
  • But the S&P 500 remains supported above 3900 for now amid a still very positive fundamental backdrop.
  • Concerns regarding valuation/profit-taking seem the greatest threat to equities at these levels.

US equity markets have seen a dose of déjà vu on Thursday; the major indices came under some selling for no apparent reason early on in the session and have failed to fully recover these losses. At present, the S&P 500 is down a modest 0.2% but, much like on Wednesday, remains supported above the 3900 level for now.

The fundamental backdrop remains broadly positive, so it seems as though the greatest threat to equity markets might just be concerns about valuations. At present, the S&P 500 trades just over 0.5% off all-time high levels set at the start of Wednesday’s session. If nerves about valuations persist, any resultant profit-taking could easily send the index back below the 3900 level and back towards more favourable levels. Perhaps dip buyers might want to get it at support in the form of January’s 3870 high (a roughly 1.0% pullback from current levels).

In terms of sectors, energy stocks are underperforming amid a mild pullback in crude oil, gasoline RBOB and natural gas prices. Semi-conductor makers are performing well, supported by the news that the Biden administration is working aggressively to address the semiconductor shortage. Payment companies are performing well amid announcements that they would be offering/expanding cryptocurrency payments across their networks. PYPL shares are up 4.5% and MA shares 2.1%.

Fundamental backdrop remains positive

The bullish narrative remains firmly intact; the Fed is staying dovish, as Fed Chairman Jerome Powell reminded the market in his very dovish speech on Wednesday that focused a lot on weakness in the labour market (weaker than expected weekly jobless claims data released on Thursday will further impress the importance for continued monetary accommodation to the Fed).

Markets still expect more fiscal stimulus from the US Congress (which is distracted at the moment by former US President Donald Trump’s second impeachment trail). US House Speaker and leader of the Democrat Majority in the House Nancy Pelosi reiterated on Thursday that she wants a deal on stimulus done by the end of the month and to be in law by the time unemployment benefits expire on 14 March. Meanwhile, moves are already being made towards securing support in Congress for part 2 of US President Joe Biden’s stimulus promises.

The White House said that a meeting with Senators on an infrastructure investment stimulus package was productive and Senators agreed that the country needs to build invest across urban and rural areas to create jobs and support the economy. (Note that Biden’s stimulus proposals amount to a $1.9T “rescue package” focusing on supporting those in dire need due to the pandemic disruption and then a “recovery package”, the size of which is not yet known.

Meanwhile, it appears as though steps are being taken to mend international relationships that frayed under the Trump administration; the US has indicated that it wants to find a solution to the Boeing/Airbus dispute (a move that will please the EU) and the US has taken the first step in de-escalation by pausing the rotation of tariffs across various EU imports that it was permitted to implement by the WTO amid the ongoing aircraft subsidy dispute (again, a move that will please the EU).

Much has also been made of a call between Biden and Chinese President Xi on Wednesday; the call went pretty much as expected (Biden expressed displeasure with Xi over various gripes the US has with China such as over Taiwan, Hong Kong, the treatment of the Uighurs and Xi urged that the two countries should avoid confrontation) and will not mark a turning point in US policy on China. Nonetheless, state-controlled Chinese press is hailing the call as a positive and this is likely to please equity investors.