US stock index futures opened negative and continued to fall as investors continue to watch the Ukraine-Russia situation with tension, as well as prepare for a possible interest rate hike by the Federal Reserve. Dow Jones index futures were down by 242 points, or 0.7%. S&P 500 futures lost 0.8% and Nasdaq 100 futures dropped as much as 1%.
The Board of Governors of the Federal Reserve is expected to meet in closed session today. All procedures for the fast-track meeting have been fully complied with, the Central Bank said. There are plans to tighten monetary policy. In other words, interest rates are likely to be raised. Given that the meeting is extraordinary, they are likely to be raised at least by 0.5%. In case of a tougher policy change, we can expect the euro to fall further in the short term.
The data released last week put the regulator in a very difficult position. Notably, the consumer price index rose by 7.5% year-on-year after climbing to 7% in December 2021. In January, inflation jumped immediately by 0.6% compared to the previous month, reflecting significant increases in food, electricity and housing prices. As for the core index, which excludes energy and food prices as well as alcohol and tobacco, prices rose by 6% compared to a year earlier, which is also the highest level since 1982. Compared to December, the core index jumped by 0.6%.
Another thing that keeps investors on their toes is the escalation of relations between Ukraine and Russia. At least that is what many news agencies, as well as the United States, believe. Many airlines have already suspended or rerouted flights to Ukraine due to the looming crisis, while the Pentagon has ordered the withdrawal of US troops from Ukraine.
Another problem is that China supports Russia, and relations between China and the US continue to deteriorate rapidly. It is not about military conflict, but about a general reversal of the Chinese economic policy towards the Russian Federation. The main issue that scares investors is how this will change US relations with other economic superpowers. It will ultimately affect the economic output and have a negative impact on stock markets.
Against all this backdrop, the Dow fell 503.53 points, or 1.43%, in the regular session on Friday. The S&P 500 Index lost 1.9% and the Nasdaq Composite fell 2.8%. Oil prices jumped on Friday along with the prices of traditional safe haven assets.
Bonds are trading mixed this morning. The 10-year Treasury note recently yielded 1.92%, although the 2-year note, which is most sensitive to Fed action, rose to 1.53%. With many economists, including Goldman Sachs, now raising their forecast to seven interest rate hikes for 2022, the yield on the 10-year paper is expected to reach 2.25% soon.
As for the technical picture of the S&P500
Having allowed a major breakout at $4,449, the bulls will now clearly focus on support at $4,378, near which active trading is already taking place. It is unlikely that an interest rate hike in the US today will add to the optimism, so it is possible that a break in this range will increase the pressure on the index and return the bear market with the prospect of renewing the lows already at $4,312 and $4,265. The bulls will probably try to cover Friday's losses today, but getting back above $4,449 will not be easy. If that happens, buying around $4,536 would not be ruled out, which would keep the bull market alive and move the trade already to a major resistance of $4,598.
