Today marked the start of the Fed’s two-day meeting with an expected announcement Wednesday regarding its latest policies. It is expected that the paring of the portfolio will commence and that rates will be held steady. This announcement will be of some concern for bondholders. However, equity markets appear to have shrugged off any ill winds a paring could cause.
Investors will be watching for signals that the Fed could raise rates in December and the probability of a rate hike then is now at 47%. The market appears to be evenly divided.
The possible rollback of stimulus has not helped the weak dollar and that’s largely because the ECB, the BOJ and BoE have all suggested they are likely to do similarly with their portfolios.
As always, the devil is in the detail and that’s the part that investors will pay attention to. There is concern particularly because when Bernanke announced a paring the market had a tantrum. The tantrum occurred despite everyone knowing that the bonds had to be sold. Yellen will be keen to avoid this problem. Inevitably, rates will rise over the medium term and it’s this rise in rates that will affect markets.
Hardly a day goes by now when either Trump threatens North Korea or North Korea threatens the U.S. One should thus keep a careful eye on geopolitical risk as that could be a significant risk for markets. The noise is probably just noise but these things have a habit of escalating.
The S&P 500 rose to yet another record and the Vix slumped to about 10. In addition, the MSCI World index hit a high and gained 0.21%. However, U.S. domestic construction fell for the second consecutive month.
Equities rallied, with the S&P 500 gaining 0.1%. The Stoxx 600 was unchanged while the Dow added 0.2%.
Currencies; The Bloomberg Dollar Spot Index fell 0.1% and the euro rose 0.4%. The dollar weakness was due in part to concerns over the construction number.
Bonds were quiet ahead of the Fed’s meeting announcement. U.S. treasuries barely moved and the yield curve steepened 1 bp. The U.S. 2-year closed at 1.40%, the 10-year 2.246% and the 30 year at 2.815%. The curve closes were 2/10 84 bp, 2/30 141.20 bp, and the 10/30 closed at 57.1%. European bonds were stable on the day with the benchmarks closing at similar levels to the previous day. The 10-year gilt closed at 1.326%, bund 0.45% and the OAT at 0.723%.
Commodities; gold fell slightly to close down 0.1%. WTI fell as traders await storage data which is expected to show an increase in inventory. WTI lost 0.9%. According to New Hope Corporation, coal is expected to fall from its current highs of $100 a ton. Gas prices are expected to rise coming into winter as supplies in the U.S. are low. China appears to be showing stress within its supply chain as there have been a number of significant drawdowns in inventory. With a shutdown in one of its major lead smelters in Liaoning province and with the major North Korean smelter just 140 miles away Haicheng Chengxin may be tempted to purchase lead despite sanctions. North Korea is China’s second largest supplier of lead concentrates by volume this year.
Aussie Market Today.
More of the same. Equity market to continue in a rally and bonds to sell off marginally. Geopolitcal risk remains high so one should be nimble.