Dow Jones futures gain sharply during the European trading session on Tuesday due to multiple tailwinds: ceasefire between Israel and Iran, and dovish commentary from a slew of Federal Reserve (Fed) officials, including Fed Vice Chair Michelle Bowman, Governor Christopher Waller, and Chicago Fed President Austan Goolsbee.
At the time of writing, Dow Jones futures jump almost 0.7% to near 42,870. S&P 500 futures added 47 points and rises to near 6,072.
The agreement of a ceasefire between Tel Aviv and Tehran after an aerial war for 12 calendar days has increased demand of riskier assets worldwide. During European trading hours, United States (US) President Donald Trump stated in a post on Truth.Social that a truce between two Middle East nations has become effective now and urged them not to violate the same. “The ceasefire is now in effect. Please do not violate it!” Trump wrote.
The ceasefire announcement has apparently led to a sharp decline in the appeal of safe-haven assets, such as the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 98.00, the lowest level seen in a week.
Another reason behind rising US equity futures is a sharp decline in the Oil price. Lower energy prices often lead to cooling price pressures, a move that supports interest rate cuts from the Federal Reserve (Fed). Interest rate cuts by the Fed bodes well for the equity market as companies get the opportunity to raise cheaper funds.
Meanwhile, Fed officials have already started arguing in favor of reducing interest rates soon, while expressing confidence that the impact of the Donald Trump’s tariff policy will be limited and citing labor market risks.
On Monday, Fed Vice Chair Michelle Bowman said, “It is time to consider adjusting the policy rate, and added, “We should put more weight on downside risks to the job market going forward.” Bowman also showed openness for lowering interest rates in the July policy meeting.
The dovish commentary from Fed officials has forced traders to raise bets supporting interest rate cuts in the July meeting. According to the CME FedWatch tool, the probability for the Fed to reduce interest rates next month has increased to 22.7% from 14.5% recorded on Friday.
For fresh cues on the monetary policy outlook, investors await Fed Chair Jerome Powell’s two-day testimony before the US House Financial Services Committee, which will be started from Tuesday.
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
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