U.S. Stocks Likely To See Further Downside In Early Trading

The major U.S. index futures are currently pointing to a sharply lower open on Monday, with stocks likely to extend the downward move seen over the past several sessions.

Lingering concerns about inflation and the outlook for interest rates are likely to weigh on the markets following the sell-off seen to close out the previous week.

The Federal Reserve is scheduled to announce its latest monetary policy decision on Wednesday, with the central bank expected to continuing raising interest rates in an effort to combat inflation.

CME Group’s FedWatch Tool is currently indicating a 57.4 percent chance of a 50 basis point rate hike and a 42.6 percent chance of a 75 basis point rate increase.

With traders reacting negatively to a highly anticipated report on consumer price inflation, stocks moved sharply lower during trading on Friday. The steep drop on the day extended the sell-off seen over the course of Thursday’s session.

The major averages finished the day just off their lows of the session. The Dow slumped 880.00 points or 2.7 percent to 31,392.79, the Nasdaq dove 414.20 points or 3.5 percent to 11,340.02 and the S&P 500 tumbled 116.96 points or 2.9 percent to 3,900.86.

For the week, the Dow plunged by 4.6 percent, while the S&P 500 and the Nasdaq plummeted by 5.1 percent and 5.6 percent, respectively.

The sell-off on Wall Street came after the Labor Department released a report showing consumer prices in the U.S. shot up by more than expected in the month of May, raising concerns about the outlook for interest rates.

The Labor Department said its consumer price index jumped by 1.0 percent in May after rising by 0.3 percent in April. Economists had expected consumer prices to increase by 0.7 percent.

With the bigger than expected monthly increase, the annual rate of consumer price growth accelerated to 8.6 percent in May from 8.3 percent in April, showing the biggest surge since December 1981. The annual growth was expected to be unchanged.

Excluding food and energy prices, core consumer prices climbed by 0.6 percent in May, matching the growth seen in the previous month. Core prices were expected to rise by 0.5 percent.

Meanwhile, the annual rate of core consumer price growth slowed to 6.0 percent in May from 6.2 percent in April. Economists had expected the pace of growth to decelerate to 5.9 percent.

The bigger than expected increase in consumer prices is likely to convince the Federal Reserve to follow through on its plans to aggressively raise interest rates in an effort to combat inflation.

The Fed is scheduled to announce its latest monetary policy decision next Wednesday, with the central bank widely expected to raise interest rates by another 50 basis points.

Michael Pearce, Senior U.S. Economist at Capital Economics, said the inflation data raises the possibility the Fed could increase rates by 75 basis points next week.

“The bigger increases in core prices a year ago meant that core inflation still edged down to 6.0% from 6.2%, but there is very little in the details of this report to suggest that inflationary pressures are easing,” Pearce said.

He added, “Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50bp rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings.”

Adding to the negative sentiment, a separate report released by the University of Michigan showed consumer sentiment in the U.S. has tumbled to its lowest level on record in the month of June.

The preliminary data showed the consumer sentiment index plunged to 50.2 in June from 58.4 in May. Economists had expected the index to edge down to 58.0.

“Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession,” said Surveys of Consumers Director Joanne Hsu.

Airline stocks turned in some of the market’s worst performances on the day, with the NYSE Arca Airline Index plummeting by 4.5 percent to a three-month closing low.

Substantial weakness was also visible among banking stocks, as reflected by the 4.3 percent nosedive by the KBW Bank Index. The index ended the session at its lowest closing level in over a year.

Interest rate-sensitive housing stocks also saw considerable weakness, dragging the Philadelphia Housing Sector Index down by 4.3 percent.

Chemical, networking, retail and semiconductor stocks also moved sharply lower, while gold stocks were among the few groups to buck the downtrend.

Commodity, Currency Markets

Crude oil futures are slumping $1.63 to $119.04 a barrel after falling $0.84 to $120.67 a barrel last Friday. Meanwhile, after jumping $22.70 to $1,875.50 an ounce in the previous session, gold futures are tumbling $21.70 to $1,853.80 an ounce.

On the currency front, the U.S. dollar is trading at 134.15 yen versus the 134.41 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is trading at $1.0462 compared to last Friday’s $1.0519.

Asia

Asian stocks nosedived on Monday as hotter-than-expected U.S. inflation data coupled with news that China’s capital Beijing is facing an “explosive” COVID-19 outbreak connected to a bar stoked concerns about global growth.

China’s Shanghai Composite index dropped 0.9 percent to 3,255.55 as Beijing and Shanghai resumed mass testing for COVID-19 and a planned reopening of schools in the capital was delayed, raising concerns of more crippling lockdowns.

Hong Kong’s Hang Seng Index tumbled 3.4 percent to close at 21,067.58, dragged down by tech giants such as Tencent and Alibaba.

Japanese shares fell the most in more than four months after U.S. stocks posted their biggest weekly drop since January on Friday.

The Nikkei 225 Index closed 3 percent lower at 26,987.44 in its biggest fall since January 27 and hitting its lowest level since May 27. The broader Topix fell 2.2 percent to 1,901.06. Fanuc, Daikin Industries, Tokyo Electron and SoftBank Group lost 4-7 percent.

Kansai Electric added 2.6 percent after the nuclear power plant operator said it would restart a reactor in August, two months ahead of its previous plan.

Japanese large manufacturers’ confidence weakened further in the second quarter, business outlook survey results from the Ministry of Finance showed earlier today. The business survey index for big manufacturers dropped to -9.9 in the June quarter from -7.6 in the first quarter.

The yen briefly fell to ¥135 against the U.S. dollar for the first time since February 2002 and the 10-year bond yield pushed to a six-year high ahead of the interest rate decision by the Bank of Japan due on Friday.

Australian markets were closed for a holiday. New Zealand’s NZX-50 Index ended 1.9 percent lower at 10,924.74 – marking its worst single session in nearly four months and closing at its lowest level in two years.

Seoul stocks plunged to a 19-month low on rate hike fears. The Kospi ended 3.5 percent lower at 2,504.51, extending losses for the fifth straight session.

Europe

European stocks have fallen sharply on Monday, extending losses from the previous session as hotter-than-expected U.S. inflation data along with news of a “ferocious” COVID-19 outbreak in Beijing’s most populous district of Chaoyang sapped investors’ appetite for riskier assets.

Weak UK growth data also raised concerns about the economic outlook in the region. U.K. GDP unexpectedly fell by 0.3 percent month-on-month in April, faster than the 0.1 percent drop in March, the Office for National Statistics said. This was the second consecutive contraction. GDP was forecast to grow 0.1 percent.

While the U.K.’s FTSE 100 Index is down by 1.2 percent, the German DAX Index is down by 1.9 percent and the French CAC 40 Index is down by 2 percent.

Valneva shares have nosedived after the French drug maker warned over prospects for its COVID-19 vaccine.

German wind turbine maker Nordex AG has also slumped despite winning an order to supply 105 MW turbines for Krivaca, the first wind farm in eastern Serbia.

Likewise, Sanofi has declined despite reporting positive results from a COVID booster.

Ferrexpo has also tumbled. The commodity trading and mining firm said the Group has recently been notified of further infrastructure damage as a result of a Russian missile strike in southwest Ukraine, which has reduced the Group’s ability to use its barging operations that serve European customers.

U.S. Economic Reports

No major U.S. economic data is scheduled to be released today.