S&P 500 Forecast: SPX struggles as oil closes in on $100

S&P 500 Forecast: SPX struggles as oil closes in on $100

US futures        

Dow futures -0.08% S&P 500 futures 0.09%  & Nasdaq futures  0.13%

European futures

FTSE 0.01%,  DAX  0.36%

• US stocks are mixed after the long weekend
• US inflation data is a main focus this week
• September Fed rate hike expectations are 60%
• Oil rises sharply as Middle East tensions rise

U.S. stocks show caution ahead of this week’s inflation data

U.S. stocks are pointing to a mixed open after the Labour Day long weekend as investors return to fresh concerns over oil prices and inflation risks ahead of the FOMC rate decision next week.

Investors are returning after a stronger-than-expected August nonfarm payroll report on Friday, which reinforced concerns that the U.S. economy could still be strong enough to keep interest rates elevated.

At the same time, oil prices are rising, with Brent nearing $100 a barrel amid renewed tensions in the Middle East, adding to concerns over another wave of inflation.

This week, attention is firmly on U.S. PPI and CPI inflation data on Thursday and Friday, which will give further clues over the Fed's rate trajectory, given Fed Chair Kevin Warsh's focus on bringing down inflation.

The market is currently pricing in a 60% chance of a Fed rate hike next week.

Treasury yields are a touch lower, with the 10-year Treasury yield at 4.76%, while the 2-year Treasury yield, which is more sensitive to short-term Fed rate decisions, has dipped to 4.36%.

Corporate Movers

The quantum computing sector is rallying after the U.S. announced that it had agreed to take minority equity stakes in a number of companies as part of a $300 million Chips Act deal. Investments will be made in D-Wave Quantum, Rigetti Computing and Quantinuum.

Qualcomm is jumping 10% after announcing a data centre infrastructure partnership with Amazon Web Services, a major win as the chipmaker looks to take on Nvidia and compete in the AI market.

S&P 500 forecast – technical analysis

The S&P 500 trades above its rising trend line, its 50 and 200 EMAs, maintaining a constructive outlook. The price ran into resistance at the record high of 7,810 and has since eased lower, but continues to hold above support at 7,615, the June high. Therefore, the uptrend remains intact.

Should support continue to hold, buyers will look to push towards 7,820, creating fresh record highs.

On the downside, a break below 7,615 is needed to expose the 50 EMA at 7,590 and the rising trend line support. Below here, attention will turn to 7,300, the July low, ahead of 7,230, the June low.

FX Markets – Dollar steadies, GBP/USD rises

The USD is attempting to recover from its recent weakness and two-week low, but the mood remains cautious ahead of inflation data on Thursday and Friday, which will be decisive for the Fed's September 16 meeting.

EUR/USD is unchanged above 1.1600 as investors look cautiously ahead to Thursday's rate decision, where the central bank is fully expected to hike rates by 25 basis points. The market will be keen to watch what the ECB signals thereafter, with markets pricing in two more rate cuts over the coming 12 months.

GBP/USD is edging higher as investors wait to hear from several BoE policymakers, including Governor Andrew Bailey, who will provide insights on inflation and the monetary policy outlook before the Treasury Select Committee. This comes ahead of next week's BoE rate decision, where the central bank is expected to leave rates unchanged at 3.75%. However, with oil prices near $100 a barrel, inflation pressures could rise further.

Oil rises as hostilities in the Middle East ramp up

Oil prices have surged to multi-week highs after Iran-backed Houthis attacked Saudi energy facilities and Tehran threatened economic warfare.

Brent rose to almost $100 a barrel, its highest level since July 24, whilst WTI almost reached $95 a barrel, reflecting physical tightness in the market as tanker flows through the Strait of Hormuz remain well below average levels.

With Tehran threatening the U.S. with economic warfare and hostilities escalating, hopes of diplomacy are fading fast. The longer the conflict continues, the higher oil prices could go.

Major investment banks are lifting expectations for oil prices this year and next, reflecting expectations that the disruption in the Middle East could continue into next year.