S&P 500: TACO Trade Sparks Sharp Recovery, but Risk Appetite Remains Fragile

• Equity futures point higher, but bond market stress and gold strength keep risk appetite cautious.
• Policy relief sparks a sharp rebound, yet tariff uncertainty and politics continue to cap full risk enthusiasm.
• Japan bond volatility and key technical levels remain critical risks for broader equity momentum.
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S&P 500 futures extended their rebound from the day before and point to a higher open with AI names, such as Micron Technology (NASDAQ:MU) and Broadcom (NASDAQ:AVGO), leading in pre-market.  Still, the fact that gold was able to hold near record highs meant there was some hesitation for the market to go full on in risk-seeking mode.

Perhaps ongoing concerns about the bond market are the reason for the hesitation, with Japanese yields recently breaking to multi-decade highs. Bitcoin was also struggling to find buyers near $90K. Traders are also cautious with the earnings season picking up speed. Banks delivered good results last week, and now the focus is shifting to technology, with Intel set to report its results after the bell today.

TACO Trade in Full Swing

It has been quite a week in the markets, all thanks to Donald Trump. After causing markets to slide with his weekend tariffs announcement, the markets were careful not to overreact too much in the last couple of days. That caution turned out to be a good strategy because of what happened yesterday at Davos.

Markets initially sighed a big relief during Trump’s speech marathon, where the US President ruled out the use of military force to acquire Greenland. Up went stocks, and the US dollar and down went the likes of the euro and franc. But even then, there was some doubt as to whether Trump would still keep those tariffs and weaponise the policy to get the same result.

Military use would have been quite unthinkable, and no one really believed the US would have gone down that road anyway. Effectively, nothing new was said or changed during Trump’s speech, as the threat of tariffs remained.

However, Trump then announced he is no longer going to impose those tariffs, which effectively ended the risks of another trade war with Europe. That came after talks with the NATO chief, where a framework agreement with NATO regarding Greenland was agreed. The so-called TACO trade then took care of things, as the markets enjoyed one of their biggest rallies in recent months. Index futures have since pushed further higher, to nearly wipe out the week’s earlier losses.

Japan’s Bond Market Implosion Poses Additional Risk to S&P 500 Forecast

Meanwhile, the turmoil in Japan’s bond market is something to keep an eye on. The country’s 40-year bond yield surged to a record high a couple of days ago amid growing fears that a snap election called by Prime Minister Sanae Takaichi could open the door to policies that further weaken Japan’s already fragile public finances.

Bond yields saw their biggest moves since Trump launched his trade war on April 2 last year, before easing back down slightly yesterday. Today, they are bouncing back, and the yen is feeling pressure. Should Japanese bond yields continue to press higher and do so more abruptly, then risk assets could feel the pressure.

S&P 500 Technical Analysis and Key Levels to Watch

The S&P 500 futures chart suggests the bullish trend remains intact, given that we haven’t yet seen a major breakdown during the short-lived tariff-related drop. The series of higher highs and higher lows remained intact, even if we saw a short-lived drop below 6,900. This level is going to be the first line of defence now for the bulls, followed by 6,866.

Yesterday’s low at 5814 now needs to hold and ideally shouldn’t be even tested following the big recovery. But in the event of a move below that level, then watch out for a sharper correction amid follow-up technical selling, with liquidity below the December low of 6771 being the first downside objective.

On the upside, the gap from Friday’s close comes in at 6976. Above that 7,000 is the next and most important key level. The all-time high from last week is at 7036, above which you have some Fibonacci extension levels to watch as per the chart.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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