Relevance up to 11:00 2022-01-25 UTC+00
Futures for US stock indices continued their decline on Monday after the worst week for the S&P 500 index since March 2020. Investors are afraid of a hawkish stance on monetary policy by the Fed. They also factor in the results of the earnings reports for the 4th quarter of 2021. The Dow Jones Industrial Average futures fell by 107 or 0.25%. The S&P 500 futures were down by 0.45% and the Nasdaq 100 futures declined by 0.71%.
On Friday, the main US stock indices nosedived due to mixed earnings reports from a number of large companies as well as concerns about the interest rate hike at the FOMC meeting to be held on Wednesday. The S&P 500 index lost 5.7% last week and closed below its 200-day moving average. Notably, the index has been trading above this level since June 2020, the very beginning of the coronavirus pandemic. The Dow Jones decreased by 4.6%, experiencing the worst week since October 2020. The heave-tech Nasdaq Composite sank by 7.6% during the week following the sell-off in the tech sector. As a result, it has been dropping for the fourth week in a row. The index is now more than 14% below its all-time November high, which increases the chances of a continuation of the downward correction.
Since the beginning of this year, many investors have been dumping risky assets, expecting the Fed to tighten monetary policy. For example, the cryptocurrency market, in particular bitcoin, fell over the weekend by more than 10%. The biggest drop was notched in November of last year with the crypto market declining by more than 50%.
As I noted above, the results of the earnings season for the fourth quarter are quite mixed. More than 70% of the companies included in the S&P 500 index published results that exceeded Wall Street estimates. However, some large companies from various sectors, such as Goldman Sachs and Netflix, disappointed investors.
A decline in the stock market due to talks about the bond-buying tapering triggered a collapse. The contradictory quarterly earnings reports only aggravated the situation.
Companies such as IBM, Microsoft, Tesla, and Apple will publish their earnings reports today.
The FOMC meeting starts tomorrow and ends on Wednesday. Investors want to get any hints at the timing of the interest rate hikes. They expect Jerome Powell to announce the date for the first key rate hike.
Over the weekend, Goldman Sachs said that the Federal Reserve would enact four interest rate hikes this year but more are possible due to the surge in inflation. “Our baseline forecast calls for four hikes in March, June, September, and December. But we see a risk that the [Federal Open Market Committee] will want to take some tightening action at every meeting until the inflation picture changes.” The Fed may also start cutting its balance sheet by $100 billion a month.
Traders are factoring in nearly a 95% chance of the key rate increase at the March meeting, and a more than 85% chance of four moves in all of 2022, according to CME data.
However, analysts do not exclude the fifth rate hike this year, which will be the most aggressive move of the Fed that investors have seen. According to the CME FedWatch scale, the chances of a fifth key rate hike have increased to almost 60%.
Outlook for S&P 500
Bulls need to defend the $4,380 level. If the price breaks below this level, it may fall even deeper to the support level of $4,330 and even to $ 4,280. The price may halt its decline but not break out of the bearish trend if it consolidates above 4,425. If so, the index may rise to 4,480. Traders are likely to open short positions at this level.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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