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Date: 17th September 2024.


US Market Awaits Fed: Will a 0.25% Cut Cause a Drop?


*European indices including the Euro Stoxx 50 and the DAX continue to trade higher.
*The European Central Bank’s latest cut continues to benefit European stocks.
*US Stocks “mixed” with the Dow Jones rising 0.55%, the SNP500 0.14% ending the day 0.47% lower.
*The Dow Jones was the best performing US index, largely driven upwards by the performance of Goldman Sachs, JP Morgan and Visa stocks.


Dow Jones Leads, Outshining NASDAQ and S&P 500!


On Monday, 84% of the Dow Jones’ stocks rose in value with Intel, Cisco Systems and Travelers Cos being the best performing. The index also rose to its highest ever value, so far adding 10.36% this year. Why is the Dow Jones performing better than the NASDAQ and the SNP500?


The stock market in general is known to benefit from interest rate reductions which will take place tomorrow evening. According to the CME FedWatch tool, there is a 67% chance of the Fed increasing 50 basis points, not 25. However, most economists believe the central bank will opt for 3 consecutive 25 basis point cuts for the rest of the year. For this reason, there is a risk of misjudging the Fed, the monetary policy and how to price the stock market. As a result, investors are turning to the Dow Jones which is exposed to fewer stocks, witnessing higher exposure to the banking sector and to defensive stocks such as Procter and Gamble. On Monday, Procter and Gamble rose 1.82%.


According to experts, if the Federal Reserve does adjust the Federal Fund Rate by 0.50%, all indices are likely to increase in value. Whereas, if the Fed cuts only 0.25%, investors will want to be exposed to a more balanced index such as the Dow Jones. Investors will want to be prepared and plan for volatility in both directions.


When monitoring the VIX and Bond Yields, certain signals are indicating some short-term weakness. The VIX is currently trading almost 1.00% higher and bond yields have added 0.005%. This does not necessarily indicate a decline but possibly some weakness before the upcoming interest rate decision. However, if the VIX declines and yields do not rise further, the Dow may again witness positive price movements.


Technical analysis currently signals that buyers are controlling the market with the Dow Jones trading above the trend-line, price sentiment line and above the VWAP. The 75-period EMA and 100-Period SMA have also crossed upwards on the 2-hour chart. The only concern for investors is that the price has risen for 4 consecutive days potentially triggering a more cautious view.


Lastly, the performance of the Dow Jones within the US session will depend on today’s Retail Sales release. The US Retail Sales is likely to decline 0.2% after rising 1.00% in the previous month. Analysts expect Core Retail Sales to read 0.2%. A higher Retail Sales figure is likely to support the stock market in the short-term.


DAX on the Rise: Can the Momentum Keep Going?


The German DAX has risen for 4 consecutive days as has the Dow Jones. However, the price has fallen as the EU Cash Open edges nearer (0.10%). The index is not trading at an all-time high but is trading at an area where the index has previously found resistance on two occasions.


The European Central Bank’s decision to cut interest rates more than what analysts were previously expecting supports the index. The monetary policy adjustment also stopped the downward trend seen so far this month. The question is now whether the DAX will continue to rise accordingly. According to economists, three factors will be necessary for continued growth; for both the ECB and Fed to continue cutting rates in 2024, positive EU data and positive earnings data.


Always trade with strict risk management. Your capital is the single most important aspect of your trading business.


Please note that times displayed based on local time zone and are from time of writing this report.


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Michalis Efthymiou
Market Analyst
HFMarkets

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