Modest recovery ahead of Fed meeting

Markets pared part of yesterday's sharp losses on Tuesday, despite concerns that China Evergrande Group's debt crisis could impact broader financial markets after S&P Global Ratings said that the developer is on the verge of default, while the Federal Reserve will be the main focus Tuesday as its two-day meeting begins.

It is expected that the Fed will give a clear signal that it will start winding down its bond purchases before the year ends, but there is more doubt about whether the Fed's 'dot plot' will shift to reflect expectations of earlier rate hikes.

S&P500 bearish scenarios

Yesterday's drop in US futures was nearly half covered today. Still, the S&P 500 index is about 2% off its record highs after printing a clear break below its one-year up trendline this week.

Increasing evidence points to weaker growth and falling consumer confidence, indicating that a drop of more than 20% in stocks in the US is more likely.

Suppose the Federal Reserve eases stimulus to prevent the economy from overheating, there would be a modest correction in the S&P500 to 4,250. Nevertheless, if the economy decelerates sharply and earnings fall, the more bearish scenario could push the index as low as 4250 in the mid-term.

Crude oil prices also rose Tuesday, after days of losses as it became apparent that disruptions in oil production in the US Gulf of Mexico will continue into next year.

As a result of the damages caused by Hurricane Ida in late August, Royal Dutch Shell, the region's largest oil producer, announced Monday that production from two of its largest fields would not resume until 2022.

A deterioration in risk sentiment continues to dampen cryptocurrency prices Tuesday, as bitcoin tumbled more than 1.5% to $42,379 after plunging more than 10% on Monday.

Events of today

Data on housing starts, and building permits data are due out on Tuesday at 15:30 EEST. Federal Reserve's two-day meeting will start today, while ECB president, Lagarde, will deliver a speech at 17:30 EEST.

Later in the session, investors will focus on crude oil supply data from the American Petroleum Institute due to release at 23:30.