- Risk appetite weakens ahead of the Fed and pivotal Microsoft and Meta earnings
- Nasdaq 100 index underperforms as investors shift to defensive sectors
- Oil prices ease, but geopolitical risks remain elevated
- Dollar supported by risk aversion, as investors eye a hawkish Fed stance
Risk Appetite In Retreat
A day before the uncertain Fed meeting and the first batch of this week’s technology earnings reports from Microsoft (NASDAQ:) and Meta (NASDAQ:), risk assets are in retreat. Following last week’s mixed tech earnings, the lingering concerns about profitability, investments and the short-term outlook for AI-related firms, and the growing threat from cheaper China-based AI models have been playing a key role in weakening risk appetite.
Yesterday’s mixed performance in the major US equity indices, with relatively measured moves, masked the underlying trends. Tech stocks were under strong pressure, with SanDisk (NASDAQ:), ASML (NASDAQ:), AMD (NASDAQ:) and Nvidia (NASDAQ:) among the main losers. This trend continued overnight in the South Korean index and other regional Asian indices such as the index.
The index is clearly feeling the brunt of the move, reaching the critical support level of the 100-day simple moving average (SMA) at 27,802, erasing a third of the strong rally since the March 31 local trough. At the time of writing, it is around 10% below its recent all-time peak of 30,759, with the next potential battleground set around the 26,500 region.
Interestingly, the index is telling a different story. It is moving loosely in line with a prevailing upward trend channel, trading just 2% below its all-time high, and thus pointing to a rotation from tech stocks to more traditional and established sectors. Is this the clearest indication yet of the first severe crisis in AI stocks, or are elevated oil prices, expected Fed tightening and slower economic momentum triggering a short-term shift from growth stocks to defensive sectors?
Oil Falls Below Key Support Area
Meanwhile, military operations in the Middle East have paused, and US President Trump repeated that the US is talking with Iran, through mediators, as are hovering around $83, around 12% below Friday’s peak. That said, investors want to see concrete progress to believe that the current episode has ended. For example, headlines about a scheduled meeting in Pakistan involving US and Iranian officials would be a very positive step.
On the other hand, a report from Pakistani intelligence suggesting that the US is preparing for a ground assault against Iran sounds far-fetched, but it is enough to keep investors on their toes, further dampening risk appetite.
Mixed Dollar Movements
The weakness during yesterday’s morning session did not last, with the greenback quickly reestablishing its dominance, despite the mostly calmer newsflow regarding the Middle East. The risk-off reaction in equities is supporting the dollar, with bitcoin suffering once again after failing to decisively break above the $65k area.
Understandably, persistent equity index weakness should keep the dollar in demand. At the time of writing, is trading around 1.1370, not far from its recent trough of 1.1324, the last support area before a drop to the 1.1200 region. Notably, the US data calendar is much richer today, with a strong Conference Board index reading potentially adding to expectations and further denting risk appetite.
Fed Meeting In Focus
Finally, as investors prepare for a relatively uncertain Fed meeting, with the chances of a rate hike ballooning to 36%, President Trump did not miss his chance to state that “rates should be lower” and that the US “should have the world’s lowest interest rates”. As widely feared, Chair Warsh is stuck between the oil price rally fuelling inflation, aggressive Fed hawks and the US President.
A probable way out of this predicament is to keep rates unchanged tomorrow, while certain uber hawks dissent by voting for a hike, which would signal that the Fed remains on a tightening path, while sparing Warsh from criticism by Trump. 
