S&P 500 Retreats Despite Powell’s Renomination, XLF Gains as U.S. Yields Soar

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S&P 500 AND XLF OUTLOOK:

  • S&P 500 ends lower on Monday as an early rally fizzles out
  • President Biden’s decision to pick Powell for a second term as Fed chairman boosts U.S. bond yields, sending stocks linked to the financial sector higher
  • The XLF ETF gains roughly 1.4% on monetary policy repricing

Most read: Nasdaq 100 Remains Attractive as Real Yields Decline, Powell Reappointed

U.S. stocks started the week on the front foot, supported by bullish sentiment after President Biden nominated Jay Powell for a second term as Fed chairman, but were unable to sustain gains as traders started taking profits amid monetary policy repricing. In this context, the S&P 500 retreated 0.32% to finish at 4,682, while the Dow Jones Industrial Average eked out a 0.05% gain to close at 35,619, after rallying almost 1% earlier in the day. Elsewhere, the Nasdaq 100 was the biggest loser, falling approximately 1.16% to 16,380, its lowest level since November 18th.

The news that Powell will remain at the helm of the Fed was initially received positively by investors, as the decision removes a potential catalyst for disruption and signals continuity in the policy framework for another four years, the length of the central bank’s chairmanship. However, optimism quickly faded as U.S. bond rates spiked across most of the Treasury curve, with the 2-year yield jumping from 0.51% to 0.58%, a high not seen since March 2020.

Front-end rate repricing suggests investors see Powell as less dovish and more inclined to raise borrowing costs to curb inflation in 2022 than Lael Brainard, who was also a contender to become Fed Chief and is known to advocate for prioritizing full employment over price stability.

Despite the weak performance at the index level, financial sector stocks climbed across the board, particularly lending institutions, whose shares tend to benefit from the uptrend in interest rates.As such, large banks such as JPMorgan, Bank of America and Wells Fargo posted strong gains at the start of the week, pushing the XLF ETF 1.4% higher after the closing bell.

From a technical standpoint, XLF is now approaching trendline resistance near the 40.00 psychological level. If bulls manage to push the ETF above this key barrier in coming sessions, buying momentum could quicken, paving the way for a rise towards the October record high at 40.86.

On the flip side, if price is rejected from current levels and bears regain control of the market, XLF could retreat towards support at 38.90 before attempting to rebound, though a move below this floor can accelerate the sell-off and trigger a decline towards 37.75.

XLF TECHNICAL CHART

Source: XLF Chart Prepared using TradingView

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—Written by Diego Colman, Contributor