S&P 500 On The Brink Of Hitting New Lows As British Pound Collapses

Zinger Key Points
  • The S&P 500 is approaching new lows after the British pound dips to unprecedented territory.
  • Experts say the next few days will be a critical period for the market.

The S&P 500 added to last week's losses on Monday as the index drifted closer toward its June intraday low of 3,636.87.

The S&P 500 traded as low as 3,647.74 Monday as investors consider whether the June lows will hold as technical support or stocks are headed to fresh 52-week lows in coming days.

Pound Falling: Turbulence in the U.K. has rattled global financial markets. On Monday, the pound briefly dropped to an all-time low of $1.0382 against the dollar before recovering to around $1.0855. Investors have been spooked by new U.K. tax cuts and investment measures that critics say will disproportionately benefit the wealthy and contribute further to the U.K.'s debt problem as interest rates rise rapidly.

Related Link: British Pound Drops To All-Time Lows: 'Existential Crisis Is Looming'

Just last week, the Bank of England raised interest rates by 0.5% to 2.25%. On Monday, the Bank of England released a statement assuring investors that it is "monitoring developments in financial markets very closely," but the central bank opted not to pull the trigger on an emergency rate hike to stabilize the pound.

"The [Monetary Policy Committee] will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit," the Bank of England said in a statement.

Related Link: S&P 500 Circles New 2022 Lows Following Latest Fed Rate Hike: Is A Recession Inevitable?

Voices From The Street: Giles Coghlan, chief markets analyst at HYCM, said the next few days may be critical in determining where the Bank of England goes from here.

"We must be quite close to a market bottom in the GBP with so much bad news priced in and the terminal rate having risen to over 6% for 2023 up from 4.5% only last week. However, the lack of BoE intervention may cause the GBP to fall lower in the near term as traders test the Bank of England's resolve," Coghlan said.

U.S. investors are likely most concerned about what impact the turmoil in the U.K. could have on the SPDR S&P 500 ETF Trust SPY.

On Friday, Quincy Krosby, chief global strategist for LPL Financial, said investors are reacting to the economic uncertainty by raising cash.

"Market levels from the Dow to the S&P 500, and over to the NASDAQ, look as though they want to head lower to find that spot where all headwinds are discounted," Krosby said.

"Credit markets globally, along with currency and equity markets, are not certain that central banks will be able to restore price stability as easily as their rhetoric suggests."

On Monday, DataTrek Research co-founder Nicholas Colas said the environment has gotten worse, not better, since the S&P hit its low point in June.

"U.S. stocks may find it challenging to hold the June lows as the week rolls on. Interest rates are higher than then, estimates are lower, and non-U.S. currencies continue to depreciate against the dollar," Coilas said.

Benzinga's Take: The 2022 downdraft in stock prices has been mostly about two things: inflation and interest rates. The higher interest rates rise, the more difficult it becomes for S&P 500 companies to grow earnings and for investors to justify higher stock prices.

Photo via Shutterstock.

Posted In: Analyst ColorEurozoneForexTop StoriesMarketsAnalyst RatingsTrading IdeasDataTrek ResearchGiles CoghlanHYCMInflationInterest RatesLPL FinancialNicholas ColasQuincy Krosby
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