Stocks Slump, but Further Rate Hike Fears Ease

The stock market collapsed 1.64% before finding its feet after the US released its September inflation data. European and Asian indices, similarly, witnessed a decline after the inflation data was released. However, economists are contemplating whether the market’s reaction was too harsh as the inflation data was not high enough to trigger a reaction from the Federal Reserve. The Core Consumer Price Index read 0.3%, as expected by the market, and the Consumer Price Index 0.4%, which was 0.1% higher than expected. Economists say the chances of an interest rate hike in November or December remain slim. Notably since oil prices have declined 12% over the past month.

The possibility of a rate hike may be a higher possibility when looking at the stock market’s reaction. However, the CME FedWatch Tool actually fell from 11% to 9%. Therefore, a rate hike continues to be a lesser possibility unless the Federal Open Market Committee members decide otherwise. Therefore, the stock market's performance will be less rated to interest rates, but investors will now turn to determining the market's intrinsic value. As part of this analysis, economists will look at the earnings data, which will start today. The index the earnings data will most influence is the Dow Jones and the SNP500. 

Dow Jones 

By the end of the US trading session, the Dow Jones ended the day 0.51% lower but had declined 1.54% before retracing. Though investors should note that the retracement has formed the traditional retracement size and is now trading at the previous breakout point. Therefore, if a downward trend is going to continue, wave patterns would indicate the next impulse wave can form at this level. The current price trades slightly higher than the important level at the 100-bar exponential moving average. However, a slight decline would see the price drop below, indicating sellers are gaining control. 

Dow Jones 30-Minute Chart on October 13th

Today, investors will largely monitor the quarterly earnings data, which is scheduled to be released before the US market opens. Quarterly Earnings reports are expected from the below companies, which are components of the Dow Jones. However, other earnings such as BlackRock, Wells Fargo and CitiGroup will affect investors' sentiment towards stocks. The stock market will be negatively affected if these companies confirm lower-than-expected earnings data. 

UnitedHealth Group – Expected Earnings Per Share $6.33 – Holds a “weight” of 10.26% – Risen by 9.52% over the past month. 

JP Morgan – Expected Earnings Per Share $3.85 – Holds a “weight” of 2.84% – Price has neither risen nor depreciated over the past month.

A concern for investors is the index saw only 12 of the 30 stocks increase in value during yesterday’s trading session. Investors look for at least 20 stocks in the green in order to obtain a strong buy signal. The stock which saw the largest increase was Walgreens, which rose by 7%. However, investors should note that Walgreens only holds a small percentage of the Dow Jones and, therefore, is a less influential component. However, a positive factor is the most influential stock, UnitedHealth rose by 0.27%. Boeing, which saw the most significant decline, declined by 2.43%.

A positive factor for the stock market is the decline this morning in bond yields. The US 10-year Treasury yields are trading 0.053% lower but still higher than the previous ranges from earlier in the week. However, another factor is the more expensive US Dollar, which makes the stock market less attractive. Sell signals will likely materialise again if the index declines below $33,656. This will likely trigger a bearish crossover and the price decline below the VWAP. however, the price action will largely depend on UnitedHealth Group's and JP Morgan's earnings data. 

EUR/USD

After releasing the US inflation data, the US Dollar rose in value against all other major currencies.  The inflation data does not necessarily indicate a hike from the Federal Reserve but does indicate the committee is not likely to pivot any time soon. The exchange rate has slightly moved in favour of the Euro since the opening of the US trading session. The US Dollar currencies index trades at 0.21% lower than the open price. If the price of the US Dollar continues to decline, the US stock market will also be supported. 

The Euro has performed well against other currencies over the past week. However, the price of the Euro is struggling to hold onto gains, particularly against the Pound. The day’s best-performing currency is the British Pound. European investors were focusing on the minutes of the last meeting of the European Central Bank. According to the document, the regulator's representatives were unsure in their opinions on further actions but chose to raise interest rates to demonstrate determination in the fight against inflation, as a result of which the key rate rose to 4.0%. Officials indicated that, according to mathematical modelling, an acceleration in the range of 3.75%–4.00% (given that it is maintained for a long enough time) would help to bring inflation back to the target level of 2%.

EUR/USD 30-Minute Chart on October 13th

Summary:

• The stock market collapsed 1.64% before finding its feet after the US released its September inflation data.
• Some economists believe the market reaction was “too harsh”, considering inflation was not high enough to trigger further hikes. 
• Throughout the day, quarterly earnings reports from UnitedHealth and JP Morgan will affect the Dow Jones. 
• The price of the Dollar rises significantly after the latest inflation data but comes under pressure from the European Cash Open.