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Bigger Bloodbath in U.S. Stock Market Likely: Factors of Further Downtrend

Last Updated September 23, 2020 1:03 PM
Joseph Young
Last Updated September 23, 2020 1:03 PM

The U.S. stock market, as seen in the performance of the Dow Jones throughout September, had been on an upward trajectory amidst growing optimism over a potential deal with China and the easing of monetary policies in major markets like Europe.

In the past three days, the unprecedented attacks against Saudi Arabia’s oil fields inserted fresh geopolitical risks into the energy market, leading the momentum of the U.S. stock market to weaken.

Although strategists currently anticipate the U.S. stock market to rebound in the short to medium term based on strong numbers from the labor market and the upcoming round of trade deal talks with China, some remain skeptical towards the short term trend of the stock market.

The Federal Reserve: An Unknown Variable

As reported by CCN.com, the Federal Reserve has been hinting at its reluctance towards decreasing the nation’s benchmark interest rate.

According to Ann Bovino, S&P Global Ratings chief economist, the current macro landscape, with inflation from oil prices, may create a challenging environment for the Federal Reserve to initiate another rate cut this month.

“While the push-through of inflation from oil prices to core prices is small, the jump in overall prices, in combination with signs that core inflation is already heating up, may make it more difficult for the Fed to cut rates further. They had a cushion to fall back on with lower inflation — they could cut rates given inflation was low. Has the cushion been removed?,” said  Bovino.

Possibly anticipating the Fed’s move to potentially sustain the benchmark interest rate in place for the foreseeable future, President Trump said that the central bank has put the U.S. in a disadvantageous position by not offering enough stimulus, which could lessen the effect of the trade progress on the stock market.

President Trump said :

“The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries. They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!”

Trump’s statement came after the European Central Bank (ECB) and its president Mario Draghi introduced a new wave of stimuli to boost the Eurozone economy.

If the Federal Reserve does not move towards decreasing the interest rate or offering more stimuli in the near term, the stock market could continue to demonstrate weakness as global economic growth slows.

Too Early to Determine the Effect of Oil

Saudi oil
Attacks on Saudi production fields this weekend triggered the biggest-ever rise in oil prices. | Image: Shutterstock

Marko Kolanovic, global head of macro quantitative and derivatives strategy at JPMorgan, said that while it is too early to determine the medium term effect of the rise in oil prices on the stock market, if barrels surpass the $80 threshold, the stock market is likely to fall harder from current levels.

In a note, Kolanovic predicted that oil prices are expected to increase in the days to come, placing the U.S. stock market at risk for a larger pullback.

“Oil futures have been trading in a tight range below 50 100 and 200d moving average, and below 12 month momentum term and hence shorted by trend followers. With today’s move, spot has broken through all the averages and there should be significant short covering ahead, ” he said in a note .

The Dow Jones is coming off a fresh 142-point decline. If futures trading is a sign of things to come, the blue-chip index could experience greater volatility in the short term.