Today is Ben Bernanke’s big day and with such a build up to the FOMC meeting which takes place later today any lack of stimulus measures will probably be taken badly by the market.
The general consensus is that this is the meeting where he will announce something to help the US economy and a great deal has been priced in by both equity and commodity markets. The messages over the past couple of months have been consistent and signals that additional monetary policy will be provided soon have been given most recently at the last minutes from the August meeting, and at his Jackson Hole symposium. The question for investors though is just how far will he go?
Until now we’ve seen their guidance of near-zero interest rates move from 2013 to late 2014 and so expectations are for a least a move of this into 2015. It will be interesting to see in just a year’s time or so whether this date is pushed back even further. Many have a sneaky suspicion it will be and that record low interest rates are here for a long time to come. But there are expectations built in that the Fed will do more than just that and launch further QE measures. Call it QE3, an extension of QE2, QE2b or Operation Reverse Twist, either way there are hopes being pinned on the possibility of more asset purchases whether they be in the form of mortgage backed securities or treasuries. The other key decision is whether the purchases will be limited or unlimited.
But one can only speculate as to what they will do, which is what market participants have been doing for months, the bottom line is that investors are expecting something from the Fed later today. We are also likely to see a reduction in their growth forecasts, which were reduced only recently in June and it is for this very reason that the market expects.
The other big question is how will the markets react? If investors get more than expected then we could see a squeeze higher, but then it could be a case of buy the rumour sell the fact as everything’s already priced in. Whatever happens at 19h00 London time there’s likely to be more volatility than we’ve seen on average over the past summer months.
The FTSE is holding steady ahead of today’s session trading at 5785 at the time of writing. The index continues in its stubborn fashion to break above the 5800/25 area which is seen as the nearest resistance at this point in time. To the downside support is seen at 5745/20/00. Clients at the moment have positioned themselves for markets to be disappointed as they remain short not just the FTSE, but all the major indices.
The European governments engulfed in huge debts enjoyed a sigh of relief yesterday as Germany smoothed the way for the creation of European Stability Mechanism, in essence a bailout fund. The ball is now in the Fed’s court as Bernanke and Co will now have to decide whether to use further quantitative easing to reinvigorate the US economy. Anyhow the euro continued to rise, reaching a new 4 months high versus the greenback at 1.2937 and closed 48 pips up for the day at $1.2898.
Despite reaching higher initially to $1747.17, gold ended rather flat at $1730.80 as investors did not want to commit too much ahead of the Fed’ meeting. However, considering the expectations for QE3 and comments made by Bernanke at the Jackson Hole summit, any disappointment could be followed by a sell off.
Amid social unrest in Libya where the US Ambassador was killed, the WTI crude prices finished only marginally higher, 16 cents up at $97.01. The same limited impact was observed in the release of the US Department of Energy’s weekly inventories report which showed a build of 2 million barrels against estimates for 1.8 million draw. It might have been the two discarded each other as well as a very cautious approach from energy investors ahead of the FOMC meeting today.