Why is the ASX 200 copping such a beating today?

ASX 200 investors are favouring the sell button today.

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A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.

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The S&P/ASX 200 Index (ASX: XJO) is under heavy selling pressure today.

Following on a recent string of record highs, the benchmark index is posting its fourth consecutive day of losses on Tuesday, down 1.2% in late morning trade, its lowest level since late February.

Here's why the ASX 200 is copping such a beating today.

What's pressuring the ASX 200 today?

Australian investors look to be following the lead of their US counterparts today.

Yesterday (overnight Aussie time) the S&P 500 Index (SP: .INX) closed down 1.2%.

Technology stocks fared even worse, with the tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) ending the day down 1.8%.

And the ASX 200 is succumbing to the same headwinds that dragged down US markets.

First, we have interest rates.

Or, more specifically, the ever-increasing prospect that the US Federal Reserve will hold interest rates higher for longer than markets have been pricing in.

This comes following some stronger-than-expected retail sales out of the world's biggest economy.

According to data from the US Commerce Department, retail sales increased 0.7% in March, coming in at the highest end of estimates in a Bloomberg survey of economists. This followed a 0.9% increase in retail sales in February.

Now that's good news for retail stocks. And it shows US consumers have some money left in their pockets.

But it's dragging on the ASX 200 and international stock markets because it also points to potentially sticky inflation. And with the US economy humming along, it further reduces the odds of a June rate cut from the Fed.

"The Fed has little reason to worry about a recession near-term, keeping their focus squarely on controlling inflation," Bill Adams, chief economist for Comerica Bank said (quoted by The Australian Financial Review). Adams has now pencilled in September for the Fed's first interest rate cut.

Andrew Hunter, deputy chief US economist at Capital Economics also has September in his sights for the Fed to begin easing (courtesy of Bloomberg).

According to Hunter:

Alongside the recent resurgence in employment growth, the continued resilience of consumption is another reason to suspect the Fed will wait longer before starting to cut interest rates, which now we think won't happen until September.

The elephant in the room

A second headwind dragging on US stocks and the ASX 200 is the spectre of an expanded war in the Middle East.

Israel has yet to respond to Iran's missile and drone attack on Sunday. Iran has said that it considers the matter over, so long as Israel does not respond to its attack, which was itself a reprisal for Israel's airstrike on Iran's embassy compound in Syria.

However, Israeli General Herzi Halevi said that Iran's attack "will be met with a response".

For ASX 200 investors and international investors alike, according to Morgan Stanley's Chris Larkin, that remains "a wild card" outside of the interest rate picture.

According to Larkin (quoted by Bloomberg):

If the S&P 500 is going to avoid its first three-week losing streak since last September, investors will need to move past concerns that rate cuts will be delayed because of sticky inflation.

In the near-term, that could come down to the tone set by the first full week of earnings season, but geopolitical tensions in the Middle East remain a wild card.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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