American and European futures are lower as investors wait for the Federal Reserve to begin its two-day meeting and announce any interest rate changes on Wednesday. Investors should keep in mind that while the Fed is expected to raise interest rates in the coming months to combat rising inflation in the United States, we believe the Fed will leave interest rates unchanged in tomorrow’s decision. Today, investors will also be digesting consumer confidence data to understand how spending in the American economy may change in the coming months, thus decoding what economic activity may look like in the short term.
The Dow Jones Industrial Average climbed 0.29% in yesterday’s session, while the S&P 500 index jumped 0.28%. The Nasdaq, the tech-savvy index, hopped 0.63%, and the Russell 2000 rose 2.29%.
Stock Market
In yesterday’s session, stock markets were finally able to claw themselves back to achieving gains after the massive sell-off we witnessed last week. Due to stock prices’ significant drops, investors may now feel that stocks are undervalued and, hence, are capitalizing on the opportunity to bag stocks of good companies at bargain prices.
Having said that, as we are expecting various economic reports this week along with the Fed’s monetary policy, stock markets are likely to remain volatile over the next few days. The main issue that investors are facing is trying to understand what the aggressive pace of winding down the Fed’s quantitative measures would mean for valuations of companies and global financial markets. Moreover, rising geopolitical tensions in the Middle East and Ukraine may also cause waves of uncertainty among investors.
Despite the rise in uncertainty and risks, the strength seen in corporate earnings and earnings growth is likely to support growth in stock markets in the short term. Today, the earnings report from Microsoft is expected to hit the markets after the stock market’s closing bell. In addition to this, Johnson & Johnson, Verizon, and American Express are also scheduled to release their earnings reports.
Cryptocurrencies
Monday was another blow to crypto markets during which Bitcoin, the king of cryptocurrencies, continued its downward trend and fell as low as nearly $32,982 before rising again, backed up by a rise in equity markets. It is now trading near the $36,000 mark. Similarly, the value of ethereum also declined to nearly $2,176.
Over the last few months, it has been crystal clear that crypto markets are positively correlated to equity markets. Due to various risks, such as tighter monetary policy and global geopolitical tensions, the drop in market sentiment has persuaded investors to withdraw capital from the volatile digital sector. However, cryptocurrency markets are supported by strong fundamentals, so investors should take this opportunity to bag cryptocurrencies at bargain prices.
Oil
Crude oil prices have been rising, mainly because of fears of tighter supplies in the coming months because of uncertainty in the UAE and Russia, which are essential players in OPEC+. The gravity of the situation in Ukraine has been increasing over the past few weeks following Russia’s decision to place its troops near Ukraine’s borders. Similarly, the UAE destroyed two missiles from the Houthis on Monday. Considering the change in market dynamics, Barclays has revised its projections for crude oil prices for 2022, raising its mean price forecasts for Brent and WTI to $85 and $82, respectively.
Gold
The rise in volatility in stock markets and conflicts in Ukraine and the Middle East have been propelling investors to increase their exposure to the precious metal as it is considered a safe haven commodity, providing refuge to investors in periods of uncertainty. As per the latest reports relating to Ukraine, the United States is planning to place about 8,500 soldiers on high alert so that they can support NATO forces in the region when need be. However, Russia has rejected all allegations that the country intends to take over Ukraine.
On the other hand, it will be tough for the precious metal to maintain its momentum as the initiation of interest rate hikes is inevitable in the coming months. When interest rates rise, the opportunity cost of holding the yellow metal also rises, making it less appealing for investors. This will eventually lead to sell-side pressure on gold and likely drag its price down.
Forex
Similar to gold, the U.S. dollar also gained traction with investors as a result of the deteriorating situation between Ukraine and Russia. In addition to this, the Fed’s likelihood of raising interest rates as soon as March is also helping the U.S. dollar rise in value. The currency is likely to remain volatile until the Fed finishes its FOMC meeting. On the other hand, riskier currencies like the euro and pound have been depreciating.
Asian Pacific Markets
The economy of South Korea expanded nearly 1.1% during the last quarter of 2021 and 4% for the entire year, achieving its fastest growth in almost 11 years. Furthermore, consumer prices in Australia jumped nearly 3.5% in 2021 and 1.3% in the fourth quarter. Inflation has risen at the fastest rate since 2014.
As of 12.33 a.m. EST, the Nikkei fell 2.10%, and the Shanghai index dipped 1.74%. The Hang Seng index in Hong Kong dropped 1.67%. The ASX 200 index declined 2.49%, and the Seoul Kospi slumped 2.73%.
