Futures on US stock indices started the week with another fall ahead of the FOMC meeting. Expectations of a sharp rate hike are weighing on the equity market. Last week, all three benchmark indices logged the worst weekly performance since reaching this year's low in June. The S&P 500 futures fell by 1%. The high-tech Nasdaq 100 showed a similar decline.
Apparently, stocks are dropping amid expectations of an aggressive interest rate hike by the Fed on Wednesday. Besides, investors are worried that further aggressive tightening to tame inflation will trigger a recession. Therefore, there could be a surge in volatility caused by key rate decisions of the Bank of England, the Bank of Japan, and other central banks. Analysts have told many times that sharp rate hikes in the next six months, not only in the United States but also in other countries, increase the risk of a recession next year. Interest rates are likely to remain at a fairly high level in 2023. It has a negative impact on market sentiment and risky assets.
The recent US inflation report dispelled hope for a softer stance. So, traders are now pricing in aggressive rate hikes. However, there are rumors that the regulator could hike the rate by 100 basis points on Wednesday. If so, stocks are sure to drop lower. According to Morgan Stanley and Goldman Sachs Group Inc., aggressive tightening could do further damage to corporate bottom lines and share prices." We're not buying the stock dip because valuations haven't really improved, there's a risk of Fed overtightening, and profit margin pressures are mounting," analysts said.
The crypto market is also going through hard times due to market uncertainty. Bitcoin fell below $19,000, while ether declined after switching to PoS last week.
As for the technical outlook of the S&P 500, after yesterday's drastic drop and gap down, the index kept declining. To build an upward correction in an attempt to find the bottom, the bulls need to push the price above the level of $3,872. It will open the way to $3,905. Only a breakout of this level will help the index resume a new upward momentum. It could approach the resistance levels of $3,942 and $3,968. A more distant target will be the level of $4,038. In case of further downward movement, if the pair index sinks below $3,835, it may hit $3,801. After that, it is likely to tumble to a low of $3,772 and to $3,744. At this level, the index may halt its drop.
