Market Uncertainty Triggers Pullback as Fed Leadership Decision Looms

Market uncertainty is beginning to translate into a correction. U.S. equity futures are trading lower as investors digest a dense mix of political, macroeconomic and geopolitical risks.

Fed leadership in focus

Later today, former President Donald Trump is expected to announce his nominee for the next Chair of the Federal Reserve. According to Polymarket, Kevin Warsh is viewed as the leading candidate, with implied odds near 94%.

Warsh is generally regarded as a policy hawk, although his more recent comments have leaned toward a faster pace of rate cuts. Markets appear to interpret his candidacy as a compromise scenario, but the uncertainty itself is weighing on risk appetite.

Shutdown risk adds to pressure

Political uncertainty is further amplified by budget negotiations in Congress. The probability of a government shutdown is currently estimated at 66%, as the deadline for approving a funding agreement expires today.

Our base case remains that any potential shutdown would be short-lived, lasting only a few days, with limited market impact. Still, the timing adds another layer of caution for investors.

Macro data may take a back seat

Later today, markets will receive December Producer Price Index (PPI) data, alongside the January reading of the Chicago PMI. However, escalating tensions around Iran, Washington’s attempts to recalibrate relations between London and Beijing, and fiscal negotiations in Congress may overshadow the macro releases.

Market snapshot

Futures across major U.S. indices are pointing lower. The balance of risks remains tilted to the downside, with elevated volatility.

• S&P 500: key range 6,870–7,000
• S&P 500 futures: trading near 6,915, close to the lower boundary of the medium-term uptrend
• Nasdaq futures: testing medium-term trend support near 25,700

Previous session recap

In the prior session, both the S&P 500 and Nasdaq closed lower. The S&P 500 briefly dipped toward the 6,900 level before staging a modest rebound into the close. Nasdaq futures saw an impulsive sell-off that was partially bought, though the index still finished in negative territory.

What is driving markets now

• Expectations around the appointment of a new Fed Chair
• Upcoming PPI inflation data
• Mixed earnings results from large technology companies, which ended Nasdaq’s six-day winning streak
• Rising geopolitical risks in the Middle East, increasing commodity market volatility
• January Chicago PMI release

Sectors

Cyclical sectors showed mixed performance. XLRE and XLF outperformed, while XRT and XLY lagged.

Growth-oriented sectors were also mixed. Gains were seen in XLC and SOXX, while SKYY and MJ underperformed.

Defensive sectors remained relatively stable, with XLV declining modestly and XLU finishing flat.

Cross-asset view

• Oil: pulled back toward 64 after testing the upper boundary of its local uptrend channel
• U.S. yields: holding near 4.26%, forming a short-term ascending channel
• VIX: gapping higher toward 19, approaching its medium-term downtrend line
• Gold: breaking below its local uptrend and sliding toward 5,100

Technical analysis by: Lucas Grant, Senior Technical Analyst at Finmire.