The stock market today
Futures in the United States and Europe are trading higher today, with the Dow and S&P 500 recouping some of Tuesday’s losses, while the Nasdaq fell. The stock market’s rebound was most likely driven by bargain hunters who saw the drop in stock prices as an opportunity. Consumer staples and utilities performed relatively better than other sectors.
Today, investors will be watching the conversations of three FOMC members, Bostic, Evans, and Williams, to gain a better understanding of how the Federal Reserve sees the US economy growing. These events may cause a shift in equity indices. In yesterday’s session, the Dow Jones Industrial Average jumped 0.26%, and the S&P 500 index hopped 0.16%. The Nasdaq, the tech-heavy index, dipped 0.24%, and the Russell 2000, the small-cap index, fell 0.20%.
Stock Market
Stock prices of technology companies slumped earlier this week after treasury yields jumped. Investors should understand that future cash flows are major drivers of the valuation of stock companies, and a rise in yields makes these cash flows less appealing. Hence, a decline in these valuations prompts a sell-off to adjust prices accordingly.
Another factor affecting market sentiment is the current feud between Democrats and Republicans. On Wednesday, the Biden administration rushed to solve a stalemate between the two parties. Conflict between the two parties comes because of differences in viewpoints regarding the scope and size of President Biden’s proposed $3.5 trillion tax and spending bill. The deadlock is hindering the President’s economic agenda while the U.S. treasury is working to dodge a default and meet its commitments.
Investors should note that although political uncertainty, both domestic and global, is likely to prevail in the coming months, a government shutdown is highly unlikely and the two parties are likely to come to an agreement. Broadly speaking, the overall outlook of equity markets remains positive based on a sound economic recovery and steady tightening of monetary policy. Having said that, market corrections are still likely to occur from time to time, but that would be because of normal adjustments to the ever-changing risk, cost of capital, and market uncertainty.
Economic Data
The pending home sales index in the United States rose to its highest level in seven months, as potential buyers embraced greater supply and more competitive pricing. The index, published by the National Association of Realtors, surged 8.1% in August, compared to the same in July, while economists expected a mere 1.4% rise. The data suggests that activity in the housing sector is showing strength after falling from peaks in 2020. However, investors should understand that affordability still remains an issue, because wage growth is one third of the growth in home prices.
Furthermore, initial unemployment claims data for last week is scheduled to be released today. Claims are projected to be 335,000. Similarly, forecasts for Q2 GDP are set to be issued today by the Bureau of Economic Analysis.
Energy Crisis
The approaching power crisis in China and Europe has weighed heavily on market sentiment. Power outages in these areas will almost certainly exacerbate global supply chains, contributing to rising consumer prices. China, the world’s second biggest economy, is experiencing widespread power outages, which are negatively affecting factory output.
Almost 20 provinces are experiencing difficulties in one way or another, and businesses in these areas have temporarily ceased operations or are working fewer hours. Beijing has asked local transportation companies to speed up the much-needed coal supply to utility providers. Furthermore, the Chinese government has ordered power rationing during peak hours. If power is not rationed, the entire grid is at risk of collapsing. Similarly, three power companies in the United Kingdom were forced to close due to their inability to meet peak gas prices. As a result, 1.7 million customers have lost their service provider.
Oil
Following the release of crude oil stockpiles data yesterday, crude oil prices dropped because the data showed a rise in inventories by 4.6 million barrels in the week ending September 24th. Inventories rose as suppliers resumed activity to pre-pandemic levels after production was curbed in the Gulf of Mexico, after not one, but two hurricanes hit the region. According to the Energy Department, output in the United States surged to 11.1 million barrels per day, touching levels seen before the coronavirus pandemic hit the world. Brent, the worldwide benchmark of crude oil, dipped 0.6% and settled at $78.58 per barrel. Brent crude crossed $80 per barrel earlier this week, its highest price over the last three weeks.
Gold
Gold prices have fallen as the dollar rose to its highest level since November 2020. The dollar index, which compares the value of the US dollar to a basket of currencies, has been rising for the past four days, and it closed at 94.112 on Wednesday. On the other hand, investors should closely monitor the dispute over the US debt ceiling, as the yellow metal could see some retracement if the government is forced to shut down.