Dow Jones futures decline due to cautious Fed policy tone
- Dow Jones futures fall as risk aversion increases amid decreasing odds of Fed rate cut bets.
- The CME FedWatch Tool suggests pricing in a 65% probability of a Fed rate cut in December.
- US stock indices decline amid mixed small-cap earnings and delayed US data due to the prolonged government shutdown.
Dow Jones futures move down by 0.72% to trade below 47,150 during European hours, with the S&P 500 futures and Nasdaq 100 futures declining 0.92% and 1.25%, trading below 6,850 and 26,000, respectively, during the European hours ahead of the United States (US) regular opening on Tuesday.
US index futures fell sharply due to increased risk aversion amid a cautious tone surrounding the Federal Reserve’s (Fed) policy outlook. Fed funds futures traders are now pricing in a 65% chance of a cut in December, down from 94% a week ago, according to the CME FedWatch Tool.
The probability of a Fed rate cut in December decreased after cautious remarks from the Fed Chair Jerome Powell last week during the post-meeting press conference. Powell noted that another rate cut in December is far from certain and also cautioned that policymakers may need to take a wait-and-see approach until official data reporting resumes.
Additionally, market sentiment worsens following a weak ISM Manufacturing Purchasing Managers' Index (PMI). The index dropped to 48.7 from 49.1 in September. This reading came in weaker than the market expectation of 49.5. Factory Orders and JOLTS Job Openings data for September will be eyed later in the day.
In Monday’s regular US session, the Dow Jones slipped 0.48%, weighed down by declines in traditional industrial and financial stocks. In contrast, the S&P 500 and Nasdaq 100 gained 0.17% and 0.46%, respectively, driven by strength in AI-related technology shares.
Market participants remain cautious as mixed earnings from smaller firms and the continued delay of key US economic data, stemming from the prolonged government shutdown, add to uncertainty. Investors are now eyeing upcoming earnings reports from AMD, Uber, Spotify, Pfizer, and Super Micro Computer, among others, for further market direction.
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
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