Stocks were poised for a sharp decline at the open on Tuesday as uncertainty built up ahead of the Federal Reserve's latest assessment of the economy from its monetary policy meeting later in the day.
Speculation has been growing on whether the Fed will send a clear signal it is prepared to print more money to support a faltering U.S. economic recovery, if necessary. The Fed will release a statement from the meeting at around 2:15 p.m. EDT.
Data on Tuesday showed an unexpected drop in U.S. non-farm productivity in the second quarter, the first decline since late 2008, underlining a slowing pace of economic recovery and further pressuring stock index futures.
While more easy money from the Fed could encourage investors to buy stocks, however, a more cautious forecast from the central bank, whose outlook has still been for a moderate recovery, may heighten concerns that the economic growth may be losing its steam.
A mere acknowledgment of a blip might also disappoint investors who have been betting the Fed would make a more concrete move, such as buying bonds to pull down market rates.
Investors increasingly believed that in a crisis or downturn, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
The FOMC has thus put themselves in the position today that if they don't follow through, we will see a sharp sell-off in Treasuries, MBS (mortgage-backed securities), corporates (bonds) and stocks as markets have been so trained to get bailed out by the Fed every time economic data turns down.
A much slower-than-expected growth in July imports in China also fueled a sharp decline in European and Asian markets as it pointed to slowing domestic demand at the world's third-largest economy.
S&P 500 futures fell 10.4 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dipped 100 points, and Nasdaq 100 futures fell 14.25 points.
The dollar rose against major currencies on Tuesday as traders trimmed short positions ahead of the outcome of the Fed meeting, while oil futures fell 2 percent to $79.77 a barrel.
Technology shares will be in the spotlight after top contract chipmaker TSMC <2330.TW>
Industrial conglomerate Eaton Corp
Exxon Mobil Corp
Shares of Novell Inc
(Editing by Padraic Cassidy)