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Stock Market This Week: Five Themes to Watch

After absorbing potentially deflationary data, the benchmark S&P 500 managed to build bullish momentum. On Friday, the index gained 1.5%, leaving a positive tone for investors heading into the weekend. Over the trailing week, the benchmark managed to move up 2.1%, finally curbing a sharply bearish trajectory.

Indeed, from the perspective of technical analysis, Friday’s session was significant as it brought the S&P 500 above its 50-day moving average (4,030 points), which represents a commonly cited gauge of near-term strength. Moving forward, though, the next logical target for the bulls will be the 200 DMA, which stands at 4,275 points.

Currently, the index sits at 4,067 points, meaning that it will need to move up 5% to inspire more bullish interest. Otherwise, the main concern among the optimists is that failure to retake the 200 DMA will convince the weak hands of the market to rush for the exits.

Fundamentally, much depends on the Federal Reserve and how it navigates these ambiguous waters. As well, geopolitics can play a major role in the equities sector, particularly with winter approaching. Below are five themes to consider in the week ahead.

Ukraine Launches a Major Counteroffensive

After months of what appeared like battles of attrition, Ukrainian resistance forces apparently caught Russian military personnel by surprise with their counteroffensive in Ukraine’s eastern front.

According to an Associated Press report on Sept. 9, “Ukrainian President Volodymyr Zelenskyy commended the military for its gains in the east, saying in a nightly video address that Ukrainian troops have reclaimed more than 30 settlements in the Kharkiv region since the start of the counteroffensive there this week.”

“We are gradually taking control over more settlements, returning the Ukrainian flag and protection for our people.” Zelenskyy said.

Based on a Sept. 10 report by CNN, Ukrainian forces entered the city of Izium, “in a sign Kyiv’s new offensive is working.” While it’s difficult to ascertain developments in this conflict due to the fog of war, should Ukraine maintain this momentum, it could have significant implications for the global markets.

Primarily, the sharp losses – in military personnel, equipment and finances – may force Moscow to consider negotiations that are more favorable to western interests. Though this concept may seem far-fetched at the moment, Russia losing winter-related natural gas revenue – by cutting supplies to Europe in a retaliatory effort – likely represents a double-edged sword.

All Eyes Again on the Fed Chair

Several days ago, Fed chair Jerome Powell sent the equities market into a tailspin. During his policy speech at the annual economic symposium at Jackson Hole, Wyoming, Powell mentioned that the central bank’s main priority is tackling inflation, effectively through raising the benchmark interest rate.

The Fed chair acknowledged that such aggressive (and thus deflationary) actions would cause “some pain” to families and commerce. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” remarked Powell.

On Sept. 8, the Associated Press reported that the central bank leader clarified his policy intentions. “We think we can avoid the very high social costs that Paul Volcker and the Fed had to bring into play to get inflation back down,” Powell said in an interview at the Cato Institute.

Still, the AP brought up some components of the tricky circumstances that the central bank faces. “The Fed’s benchmark rate affects many consumer and business loans, which means that borrowing costs throughout the economy will likely keep rising.”

Jobless Claims Impose Complex Nuances

On paper, the most recent data on the unemployment picture features positive implications. According to Zacks, initial jobless claims reached 222,000 last week, representing a 6,000 worker decline from the downwardly revised 228,000 the previous week. Further, the investment resource notes that this “is the lowest weekly headline level since the 202K we saw back ahead of Memorial Day.”

While fewer workers being unemployed is typically a desired statistic, the challenge is that the “low jobless claims represent tightness in an already-tight labor market.” However, the Fed would like to see the labor market “gain a little slack in order to fight inflation.” Therefore, Zacks reasons that good news in a way could be bad news.

Cynically, it’s not difficult to accept this counterintuitive logic. While Powell stated that he intends to avoid the dramatic interest rate increases of the Volcker administration, the incredibly tight labor market suggests that the Fed will really need to step on the gas regarding its hawkish monetary strategy.

Cryptos Commanding Attention

Over the past several weeks, the cryptocurrency community focused on an upcoming event called the Merge, involving a major blockchain project transitioning from a proof-of-work (PoW) consensus mechanism to proof of stake (PoS). While the underlying transition should theoretically be helpful for the broader integration of blockchain technology into mainstream institutions due to energy efficiencies, it’s not a guaranteed positive catalyst.

Fundamentally, the Merge represents a high-stakes wager. According to experts in the field, nothing of this magnitude has ever been attempted. As well, should the transition fail, it could have a detrimental ripple effect for the myriad blockchain projects that depend on the network making the pivot. Thus, the crypto community is looking anxiously at the date of the Merge, which may officially materialize sometime between Sept. 13 and Sept. 15.

To be fair, the total market capitalization of all cryptos once again broke above the $1 trillion level, though barely. Nevertheless, it’s conspicuously below the $1.15 trillion level posted in mid-August. As well, around the end of May, the total market cap hit $1.3 trillion.

Earnings in Focus

For the upcoming week, the number of earnings disclosures will be very light. Nevertheless, a few intriguing reports will be issued, starting on Monday with computer technology firm Oracle (ORCL). Analysts anticipate that the company will deliver earnings per share of $1.08. Market observers may tune into the conference call to potentially acquire insights into business technology demand.

On Thursday, another tech-related company, Adobe (ADBE) will disclose its earnings results. Analysts anticipate that the firm – popular for its creative applications such as Photoshop – will post an EPS of $3.35. It’s possible that Adobe could benefit from the burgeoning gig economy, particularly as workers face off with employers about return-to-office initiatives.

Finally, sports fans may want to tune into the earnings report of Manchester United (MANU). The English soccer (football) juggernaut is expected to deliver an EPS loss of 18 cents.

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