- Summary:
- Dow Jones index has formed a bullish flag pattern as Wall Street banks turn defensive because of the fear of negative interest rates and trade war
The Dow Jones nosedived today as investors continued to worry about the brewing trade war, rising coronavirus cases, and the likelihood of negative interest rates.
Dow Jones banks worry about negative interest rates
Yesterday, I wrote that negative interest rates is a key reason why shares of Lloyds Bank have been falling. Now, investors in the United States are worrying about negative rates by the Federal Reserve as deflation looms.
In recent interviews, Fed chair, Jerome Powell has insisted that he is not considering interest rates. However, the market is not ruling this out especially now that inflation has disappeared and rates are already at record lows.
Negative rates would be devastating for banks at a time when customer defaults are surging. In the most recent earnings, banks allocated billions of dollars to provisions. Therefore, with rates in the negative zone, banks would pay the Fed to have it store their money. According to Bloomberg, if the Fed brings rates to zero, the big banks would lose between $1 billion and $2 billion annually. The losses would be more below zero.
Dow Jones banks have dropped in the premarket, with Goldman Sachs shares down by 0.60%. JP Morgan shares are down by 0.85%. Other banks like Wells Fargo and Morgan Stanley have dropped by 0.70% and 0.67% respectively.
US stocks wait for China parliament meeting
The Dow Jones is also falling because investors are worried about the ongoing trade skirmish between the United States and China. In a tweet yesterday, the president said that the “misinformation” campaign against the US and Western countries came from the top. In essence, he blamed Xi Jinping for the “campaign.”
The Dow Jones index is reacting to this because of its timing. The annual parliament session in China will begin today, attracting 3,000 members. Analysts believe that this team will likely pressure the government to respond in kind to the US.
As I reported a while ago, some Xi advisors have lobbied him to do away with the trade deal that was reached in January. They argue that the US is currently in a worse economic situation than China. That is because the economy is facing the worst economic downturn while China has started to recover.
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Dow Jones technical outlook
The Dow Jones is trading at $24,490 in the futures market. This price is between the 38.2% and 50% Fibonacci Retracement level. It is also between the 50-day and 100-day exponential moving average. Interestingly, the Dow Jones is forming a bullish flag pattern, which is a sign that it will breakout in the upside.
On the flip side, a decline below the lower side of the flag at $22,845 will invalidate this trend. This price is also along the important support that I talked about yesterday.