Dow and DAX 40 tumble in FOMC as growth worries weigh on risk appetite

Dow Jones, DAX 40 – Talking Points

  • Dow dips back below 31,000 in European session
  • The DAX 40 dips to the top of the key support zone around 12600
  • Investors remain nervous ahead of pivotal FOMC meeting

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Global equity indices remain under pressure as rising interest rates and global growth concerns weigh on risk appetite. Market participants see tomorrow’s FOMC meeting as a potential catalyst for a major market move, with the potential for a 100 basis point (bp) hike still on the table.

The outlook for global growth has received renewed attention lately as traders digest the potential impacts of aggressive central bank tightening. Rates have risen across the globe as market participants constantly reassess the trajectory of central bank policy. The 10-year Treasury yield traded at 3.59% on Tuesday, the highest level since 2011.

Data in the US continues to be mixed, making it harder to predict potential impacts on Fed policy. Despite a plethora of disappointing housing market data lately, Tuesday morning showed an unexpected jump in August housing starts.

The difficult macroeconomic environment has yet to force traders to reassess future corporate earnings, which may explain why the bottom has not yet been reached in equity markets. Before the opening bell in New York, Ford shares fell 9% after it revealed that continuing supply chain challenges would cost the company an additional $1 billion in the third quarter.

Dow Jones 4 hour chart

Chart created with TradingView

The Dow came under pressure following last week’s hot CPI release. The pre-CPI rally failed in the key pivot zone above 32200, before settling at the psychological level of 31000. This level has since given way to downward pressure, and price has attempted to carve out a new pre-FOMC low around 30600. I expect this level to fall back given the possibility of significantly increased volatility. Traders should remain nimble in and around the FOMC decision and Powell’s press conference as major swings could occur in an instant. If there is risk of a rally on Wednesday, buyers could look to recapture the pre-CPI high.

DAX 40 Daily Chart

Chart created with TradingView

On the daily timeframe, Tuesday’s pullback in the DAX 40 brings us to an interesting point ahead of major risk events. Price has been locked by trendline resistance all year, with the last test in August resulting in another rejection. Despite the series of lower highs, price has carved out a definitive support zone above 12400. If risk assets fall further following another Federal Reserve rate hike, this zone could come under renewed pressure. While the easy trade would be to play for a bounce here, there is a chance that this test will be different. The bears have been relentless in bringing prices back into this zone, and a break could be in order. Descending triangles are notorious bearish continuation patterns, leading me to lean towards lower prices ahead.

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— Written by Brendan Fagan

Contact Brendanuse the comments section below or @BrendanFaganFX on Twitter

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