- Market participants increased the likelihood of a September rate hike to 80%.
- Traders are preparing for the FOMC policy meeting on Wednesday.
- Major companies like Apple and Amazon are set to release their earnings.
Equities ended down on Monday after a brief spike as investors applauded the pause in US-Iran strikes and the increased likelihood of de-escalation. Meanwhile, market participants are gearing up for major earnings reports and the FOMC policy meeting.
The US stock market declined the previous week amid tensions in the Middle East, which clouded the economy outlook. An attack on tankers in the Strait of Hormuz set off the US, which hit Iran with bombs for two weeks without pause. The renewed conflict led to a spike in oil prices, which reignited inflation concerns.
At the same time, the uncertain future hurt risk appetite, prompting investors to seek safer assets like the dollar. Initially, June data showed cooler-than-expected inflation. This gave traders hope that price pressures would come down. Moreover, the Fed would not have to tighten monetary policy too much.
However, all that came before the new conflict. Pressure was mounting again on policymakers to tighten monetary policy. The war escalated to include Yemen and Saudi Arabia, further disrupting oil supply. Market participants increased the likelihood of a September rate hike to 80%.
However, there was hope after the US paused its strikes on Iran, and reports pointed to a resumption of talks.
Tech valuations (Source: Bloomberg)
Still, high borrowing costs weigh on equities by making the business environment unfavorable. It especially puts pressure on growth stocks. The recent surge in rate-hike bets has paused the AI sector’s rally. These stocks that had previously fueled the rally on Wall Street are now causing the decline.
Elsewhere, market participants are preparing for the FOMC policy meeting on Wednesday. There is a 36% chance that policymakers will hike borrowing costs. Additionally, traders will assess the tone during the meeting for clues on future moves. There is a chance policymakers will remain hawkish, given the recent escalation in the Middle East. A hawkish outlook will keep the stock market subdued.
Meanwhile, major companies like Apple and Amazon are set to release their earnings reports this week. Robust numbers could push stocks higher and boost expectations for other major companies. On the other hand, if the reports disappoint, equities will collapse further.
