- Dow Futures crashed by 455 points at their lowest point as conflict with Iran intensifies.
- The U.S. stock market is vulnerable to a big correction, especially with markets reacting negatively after a liquidity injection.
- Even a rate cut in 2020 may further slow the equities market.
After reports of Iran firing missiles targeting U.S. troops in Iraq, Dow futures crashed by 455 points. The steep drop in the U.S. futures market comes after the Fed injected new liquidity into markets on Jan. 7.
Relaxed financial conditions triggered by the expansion of the repo market have been attributed as the major driving factor of the recent stock market rally. And even fresh liquidity has not been able to stop the Dow Jones pullback.
U.S. stock market reaction indicates significant fear
Throughout the past week, strategists like CNBC’s Jim Cramer said they are fearful of the U.S. stock market trend because of gold’s explosive rally.
Within three weeks, the price of gold jumped by more than 7.5 percent; in the last 24 hours, it surged above $1,600.
There is little resistance for gold from $1,600 to $1,800 and as such, analysts warned that fear of missing out (FOMO) in the gold market could add to the downtrend of the stock market.
Up until Iran’s response this evening, the Dow Jones was relatively stable. It even posted minor gains on Monday, leading investors to believe the market has already priced in a worse altercation between the U.S. and Iran.
However, a near 2% fall for the Dow Jones during after-hours trading indicates the U.S. stock market did not price in direct attacks on U.S. troops by Iran and the precarious direction the conflict has taken.
The Spectator Index reports that Iranian jets have left air bases in Iran, indicating that the Iranian government intends to further provoke the U.S. in response to Soleimani’s passing last week.
Even a rate cut may not be enough
An additional rate cut has been hinted by major central banks including the Fed and the European Central Bank (ECB) in the past several days.
As geopolitical risks intensify amidst fears of a full blown war with Iran, the Fed and central banks in Europe could eye an extra rate cut in the first half of 2020.
The U.S. stock market and the Dow Jones have not responded with such large daily movements during trade discussions with China, even when the entire deal was at risk of falling out.
Whether relaxed financial conditions and a low interest rate are sufficient to calm markets that are clearly rattled by the crisis in the Middle East remains to be seen.
Still, the market’s heavy response to the Middle East conflict almost immediately after the Fed’s injection of new liquidity will likely serve as a dire warning to investors that the current stock market downtrend cannot be dismissed.
The above should not be considered trading advice from CCN.com.