Dow Jones, DAX 40 Limp into FOMC as Growth Concerns Weigh on Risk Appetite

Dow Jones, DAX 40 – Talking Points

Dow slips back below 31000 during European sessionDAX 40 plunges to top of key support zone around 12600Investors remain on edge ahead of pivotal FOMC meeting

Equity benchmarks globally remain under pressure as rising interest rates and global growth concerns weigh on risk appetite. Market participants are looking to tomorrow’s FOMC meeting as a potential catalyst for a major market move, with the potential for a 100 basis point (bps) hike still on the table.

Global growth prospects have come under renewed focus lately, as traders digest the potential impacts of aggressive central bank tightening. Rates have marched higher across the globe as market participants constantly reassess the path of central bank policy. The 10-year Treasury yield traded through 3.59% on Tuesday, the highest level since 2011.

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

The challenging macro environment has yet to force traders to reassess future corporate earnings, which may explain why the bottom has yet to fall out in equity markets. Prior to the opening bell in New York, Ford shares tumbled 9% after revealing that continued supply chain challenges would cost the company another $1 billion in the third quarter.

Dow Jones 4 Hour Chart

Chart created with TradingView

The Dow has been under pressure following last week’s hot CPI print. The pre-CPI rally failed in the key pivot zone above 32200, before settling in at the 31000 psychological level. That level has since given way to downside pressure, and price has attempted to carve out a fresh pre-FOMC bottom around 30600. I expect this level to fold given the possibility of significantly heightened volatility. Traders should remain nimble into and around the FOMC decision and Powell press conference, as major swings could occur in an instant. Should risk rally on Wednesday, longs may look to reclaim the pre-CPI swing 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 spot ahead of key risk events. Price has been penned in by trendline resistance all year, with the latest test in August resulting in another rejection. Despite the series of lower highs, price has carved out a definitive support zone above 12400. Should risk assets take another leg lower on the back of yet another Federal Reserve rate hike, this zone may come under renewed pressure. While the easy trade would be to play for a bounce here, there is a chance that this test could be different. Bears have been relentless in dragging price back to this area, and a break may be on the cards. Descending triangles are notorious bearish continuation patterns, which leads me to lean toward lower prices ahead.

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— Written by Brendan Fagan

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