As we begin the holiday-shortened week, investors are hoping for a reprieve from the prolonged downturn that has seen stocks lose ground in 10 out of the last 11 weeks. The Dow Jones Industrials and the tech-focused NASDAQ are each coming off of a 4.8% decline over the past five trading sessions, while the broader S&P 500 fared the worst of the lot, shedding 5.8% in value last week. Both the NASDAQ and S&P fell deeper into bear market territory, down 23% and 33% from their respective highs. Meanwhile, the Dow is off 19% from its peak.
The key factor that has been driving equity values down this year is the Federal Reserve’s plan to tame inflation by raising short-term interest rates. The lead bank began hitting the monetary brakes with more force last week, raising its overnight lending rate by 75 basis points, or 0.75%. Moreover, it appears that another equally sized move will be made at the Fed’s next meeting in July, and more rate increases are in store for the remainder of the year. In general terms, equities tend to fall out of favor when fixed-income investments become more attractive. Also at play here is the concern that the Fed might go too far and trigger a recession, which would be bad news for corporate profits.
While the U.S. markets were closed Monday in observance of Juneteenth, the European bourses closed mostly up. The U.K.’s FTSE rose 1.5%, Germany’s DAX gained 1.1%, while France’s CAC-40 ended at breakeven.
Looking ahead to the new day, U.S. stock futures are pointing to sharp upside move at the open. Elsewhere, Asian markets were mostly up overnight, while stocks in Europe are in positive territory. Meanwhile, oil prices have regained some lost ground, rising 2.2%, to around $110.40 a barrel.
The economic calendar for this week includes existing home sales for May due out this morning. There, a slight deceleration is expected, mostly due to rising mortgage costs. This will be followed by the figures for new home sales on Friday. However, investors will more interested in next week’s reports on the Personal Consumption Expenditures Price Index for May due out next Thursday, which will give the market key readings on inflation.
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
