2 Reasons Why Stocks Are Likely To Drop Further

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The stock market faced significant downward pressure recently due to a combination of concerns over inflation and geopolitical tensions, which may continue to encourage investors to take “risk-off” trade. 

US March CPI means no cut for now

Inflation worries resurfaced as the latest data showed a notable increase in the consumer price index (CPI). The CPI rose by 3.5% from a year ago and 0.4% for the month. This uptick in inflation raised concerns among investors about the potential for higher prices eroding purchasing power and impacting corporate profitability. Inflationary pressures can lead to higher interest bond yield, which can weigh on economic growth, stock prices and corporate earnings, thus dampening investor confidence in the financial market.

The “last mile” of the inflation fight is proving tougher. Underlying inflation, which excludes volatile food and energy components, the core CPI also accelerated 0.4% every month while rising 3.8% from a year ago, compared with estimates of 0.3% and 3.7% respectively.

That is forcing investors to rethink bets that inflation would steadily decline to central banks’ targets, generally around 2%. There are even concerns it could surge again, mirroring the second wave that characterised the high inflation in the 1970s.

If the Fed believes that inflationary pressures are not temporary or transitory, they may choose not to cut rates immediately. Lowering interest rates when inflation is above target could potentially exacerbate financial imbalances or asset bubbles. If the Fed believes that cutting rates could lead to excessive risk-taking behavior in financial markets, they may opt to keep rates steady or even raise them to maintain financial stability, despite high inflation.

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SPXUSD (H4). S&P500 rebounded from 5100.00.  Downward pressure may cause it to retest or break the level 5100.00.

Geopolitical tensions escalate 

Geopolitical tensions in the Middle East added to the negative sentiment. Reports of Israel preparing for a potential direct attack by Iran heightened concerns about escalating conflict in the region. The Middle East is a crucial region for global oil production, with many countries in the region being significant exporters. 

Heightened tensions or conflicts in the region can disrupt oil production and transportation routes, leading to supply shortages. This disruption can result in higher oil prices, which can increase production costs for businesses and lead to higher prices for consumers. Additionally, higher oil prices can reduce consumer spending on other goods and services, as more income is diverted towards fuel expenses.

The Middle East serves as a critical transit route for global trade, including oil shipments. Any disruption in this region can affect trade flows and supply chains, potentially leading to delays or higher costs for businesses engaged in international trade. Heightened geopolitical tensions may also prompt countries to impose trade restrictions or sanctions, further complicating global trade dynamics and impacting businesses' bottom lines.

Therefore, we anticipate that stocks will continue to face downward pressure in the coming days, accompanied by increasing pressure on oil prices. Additionally, gold may continue to rise due to its status as a safe-haven asset, despite reduced expectations for a rate cut by the Fed.

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Bullish divergence is forming on the Gold chart. Gold may head towards 2410.00.

More By This Author:

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Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. ...

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