WORLD STOCK MARKETS ARE “HIGHER AND LOWER” AFTER THE FED MEETING:
Asian stocks too the early lead from US weakness following the Fed’s decision to “keep” o/n fed funds at 5.25% - and traded lower until about the last 2-hours, in which a rather sharp and violent rally began off the lows. The reason floating about was that Japanese machinery orders rose unexpected, thereby giving rise to the opinion that capital spending was still strong. However, we would be remiss if we didn’t say that the +2.7% Nikkei rally off the lows is a bit much for such a report. In South Korea…the rally closed +1.4% higher off the lows. They both closed higher on the session….rising +1.2% and +0.3% respectively.
Turning to Europe however, European shares opened strong – all the majors showing gains of +0.5% to +0.6% in the early going; but they have weaken rather sharply – with all now sporting -0.3% declines. There is talk by the Bank of England that there are more interest rate increases in the pipeline, but we would have thought – and reasonably so we think – that higher Asian prices would have allowed for European shares to carry through on this rally. They did not, and this the crux of this whole exercise – share prices have had an opportunity to rally after the Fed decision to hold interest rates steady…but they cannot follow through. Could this very circumstance be in store for US shares? Perhaps.
FED “STANDS PAT” AS EXPECTED:
However, we did not expect them to do so; we were clearly in the minority of about 20%, and we were clearly wrong. The fact of the matter is that the “pause” didn’t elicit much in the trading community given it was widely expected; the Fed choose not to “surprise” the markets as we had anticipated. In their statement, they highlighted 3-areas, economic growth, inflation and policy guidance. In terms of economic growth, they have become more confident that it is indeed slowing down; this is a rather abundant account of reports that confirm this. Inflation: they aren’t happy about its “elevated” level, but noted “inflationary expectations” were still ground, and likely to remain so given economic growth is slowing…they expect core inflation to moderate as well. And finally, policy guidance – they once again indicated that they view the risk of inflation being too high as greater than the risk of growth being too low; which now they want to stand back from the fray and monitor given the lagged effects of previous interest rate tightenings.
Also of note, Richmond Fed President Jeffery Lacker was the lone dissenter – his view was that another 25 basis points were warranted. This suggests there were “more dissenters”, but that they didn’t want to be seen as undermining the new Fed Chairman’s credibility; one is just fine to show the world the meetings are open to opinion – but more than would suggest the Fed itself doesn’t know the proper course…and the markets simply wouldn’t have take kindly to this.
WHAT DOES THIS MEAN FOR OUR TRADING STRATEGY?:
We were not surprised by yesterday’s lateday weakness after an initial surge in reaction to the Fed’s decision to “pause”; however, we now turn our attention to the aftermath – how do prices trade going forward. With the S&P higher by 4.40 points this morning – the onus is upon the bulls to push prices higher. But having said that – prices are at a very important inflection point right here and right now; either they rally sharply…or decline sharply. Do we think they will do so past the recent S&P 500 highs of 1295? No, we do not, but they may push prices to 1280 to 1290, and perhaps they can push’em still higher, but the probability isn’t very high in our opinion. A break above 1295 would get our attention however.
Our strategy has been to sell rallies as they develop; and it will remain so for the time being. But we want to modify this strategy very modestly. We are willing to sell short to test the waters during this morning’s rally; but we don’t want to get aggressive just yet. We do however, want to become aggressive short sellers on a decline below the S&P 1265 level, and even more so once the 1260 level is broken. Let’s keep this simple.
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