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  • Weekly Focus: The Fed Is Set to Send the S&P 500 Index to the Bottom

Weekly Focus: The Fed Is Set to Send the S&P 500 Index to the Bottom

Financial conditions in the market are worsening with every passing day as the S&P 500 broad market index continuously takes a dive. This week has started with a 0.8% decline to 3844 points, while gold and crude prices are losing 0.7%. This situation is pushing the economy close to the early deflationary impact stage that, when reached, could lead to a recession. 

Investors are discussing the Federal Reserve’s (Fed) meeting this week and most of the discussions are rather extremely pessimistic. Ray Dalio and Jeffrey Gundlach forecast a 25% drop of the market amid an interest rate hike of the expected 75-basis points. Some even expect the interest rate to be raised by 100 basis points.

If the Fed wants to find somewhat of a safe place for itself between aggressive a deflationary monetary policy and sliding towards a deep recession in the United States, it may find it fit to stick to its 75-basis points hike. This is well in accordance with the basic scenario that goes hand in hand with the slide of the S&P 500 index towards 2000-2200 points. There are more external reasons for such a scenario to become a reality. The conflict between the U.S. and China over Taiwan is seen to be heating up and this could mean that China may act aggressively to bring the separatist island under the control of Beijing after  China’s communist Party Congress will begin on October 16. U.S. President Joe Biden warned that the U.S. would defend Taiwan from a Chinese attack. 

Whatever the case, the first impact to the economy will be felt this week if the Fed raises its interest rates as expected. If the Fed decides to hike its interest rate to 3.0-3.25% on this occasion the S&P 500 index may deteriorate to the year lows at 3635 points, or even lower to 3500-3550 points. After this decline the index may stabilise or rebound to 3700-3800 points in the second half of October. At this point many may discuss the end of the Fed’s interest rate hike cycle, and this could be the ideal moment for the S&P 500 index’s downturn to begin to go towards 2000-2200 points. China could be accused by the U.S. of provoking instability in the financial markets, while the record inflation together with the monetary tightening across the globe would be seen as a real reason for the downturn. So, no better moment to open short positions on S&P 500 index is likely emerge. So, it is time to restore 50% of the target volume short position that was closed not long ago.

Crude prices continue to slide as scheduled along an aggressive downside formation with a primary target at $75-85 per barrel of the Brent crude benchmark. A further decline of Brent crude prices to $85 per barrel by the end of the week is likely. Even though this is seen to be the most expected scenario, there seems to be a perspective that prices have high chances to go towards the extreme targets of $50-65 per barrel.

Gold prices are under pressure after they broke through an important support level at $1680-1700 per troy ounce. They are now going down to the $1350-1450 per ounce level. More short positions could be opened for anyone who wants to join the slide if prices retest the $1680-1700 level per ounce.

EURUSD continues down amid an aggressive downside formation with targets at 0.97000-0.98000. Aggressive short positions that were opened at 0.99500-0.99700 should be closed by the end of Tuesday before the Fed announces its decision.

GBPUSD is also following an aggressive downside formation with completed targets at 1.12500-1.13500. There are still no good entry points to open any trades.