'It's all about the FOMC today'

Clare MacCarthy

Senior Editor, Saxo Bank Group
Clare MacCarthy first joined Saxo Bank Group in 2012 to work as a senior editor on TradingFloor.com. Prior to this, she worked as a Denmark-based foreign correspondent for The Economist and the Financial Times and also served as Copenhagen bureau chief for Dow Jones Newswires.

"It's all about the Federal Open Market Committee meeting today, there's an awful lot on the agenda, a lot of ways developments can be spun, both to the hawkish and the dovish direction, but I think that the general takeaway is that there's nothing that's going to sustain lower expectations for the Fed from here," says John J Hardy, Saxo's Head of Forex Strategy.  

One intriguing possible development, he adds, would be that the Fed might take a look at its pace of balance sheet tightening because the huge fiscal drag from Trump's tax reform might make it uncomfortable with being on a preset schedule for its quantitative tightening. "I think that's the only credible somewhat dovish argument out there but otherwise on the rate front, I think there's nothing that's going to be seen as dovish," Hardy says. One possible novelty would be the introduction of a press conference at every meeting, meaning that each meeting from now on would be "live" in terms of monetary policy adjustments, he concludes.

Elsewhere in the FX space, today's US rate hike is set to pile more pressure on beleaguered emerging market nations, particularly those with substantial current account deficits, notably Brazil, Mexico and South Africa.

For equities, the FOMC meeting and expected US rate hike has taken the wind out of their momentum and put them on pause for now, with some profit-taking in Asia overnight, says Peter Garnry, Saxo's Head of Equity Strategy. Among individual companies, electric vehicle maker Tesla is in the spotlight following a decision by the cash-strapped company to cut 9% of its workforce, though none from production units. "We've got a negative rating on Tesla," Garnry says.

In commodities, gold is sitting on the fence waiting to see if the FOMC delivers another "dovish hike", says Ole Hansen, Saxo's Head of Commodity Strategy. "Gold is staying glued to $1300/oz ahead of the expected seventh US rate hike in this cycle," he adds. Upside risk is building on a dovish hike with open interest at a 6-month low and the fund net-long being close to a two-year low. The level to watch is $1308/oz with downside capitulation risk below $1286/oz.

Crude oil is also rangebound but for a different reason – it's being pulled in opposite directions by opposing forces with internal Opec opposition against raising production being offset by a Russian desire to eliminate the 1.8 million barrels/day cutbacks agreed back in 2016.

Finally today, the much-talked.about Trump/Kim summit was a non-event for the bond market and the yield on the 10-year US Treasury closed almost unchanged at 2.96% 

The chief risk from today's FOMC is that a hike will provoke more flattening of the yield curve, and possible even invert it, heralding another economic downturn, says Althea Spinozzi, of Saxo's bond trading desk.

Access both platforms from your single Saxo account.

Disclaimer

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice or a personal recommendation and does not take into consideration your objectives, financial situation and needs. Saxo Capital Markets UK Limited will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information. We assume no liability for errors, inaccuracies or omissions contained within these materials.

It is important that you understand that with investments, your capital is at risk. We offer leveraged products which carry risk and can result in losses that exceed deposits. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more here.

Additional Key Information Documents are available in our trading platform.

Saxo Capital Markets UK is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

Please read our full disclaimer - https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer