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U.S. Large Caps Pull Back Ahead Of Weekend Break

Posted Friday, March 19, 2021 by
Shain Vernier • 2 min read

At this hour, the big three U.S. indices are trading mixed. The large caps are getting the worst of it, as the DJIA DOW (-125) is off by triple-digits. Coverversly, the S&P 500 SPX (+8) and NASDAQ (+113) are in the green with only a few hours left in the third trading week of March.

The economic calendar is quiet today, with only the Baker-Hughes Rig Count being scheduled. However, the Fed has made headlines by pledging to end emergency relief for banks in 2022. Here’s the crux of this situation:

  • The Fed will grant a year-long grace period for the way mega-banks account for ultra-safe assets.
  • Fed: “Because of the recent growth in the supply of central bank reserves and the issuance of Treasury securities, the board may need to address the current design of the SLR [statutory liquidity ratio] to prevent strains from developing.”

So, what does this mean? Basically, it means that banks will have to claim Treasuries and cash as assets beginning in 2022. This could discourage them from purchasing more Treasuries or taking more consumer deposits; indirectly, it may lead to reduced lending as the banks recalibrate their leverage ratios.

Right now, it’s unclear on the impact that this move will have on the markets for the foreseeable future. But, it is the first sign that 2022 will be the end of the COVID-19 Fed relief-era. Today, U.S. large caps are beginning to price this eventuality in.

Large Caps Pull Back As Fed Shifts Policy

June E-mini DOW futures are in the red, off for the third time in four sessions. However, the top 30 U.S. large caps remain firmly in bullish territory.

large caps
June E-mini DOW Futures (YM), Daily Chart

Going into Monday’s action, here are two levels to watch:

  • Resistance(1): All-Time High, 33,116
  • Support(1): 38% Current Wave, 32,542

Overview: As you can see from the daily June E-mini DOW chart above, U.S. large caps are in good shape. The last “dip” in this market occurred at the beginning of March; since then, bidders have dominated the action. 

So are U.S. equities headed higher? In the short to intermediate-term, yes. However, the next stimulus is a ways off and there is a light at the end of the Fed’s unlimited QE tunnel. Get ready for the steam to leave equities beginning in Q4 2021.

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