Watch Out for Wednesday – How Strong is the Recent Appetite for Risk?

The roadmap to the end of the trading year will be laid out when the US Federal Reserve releases its market update on Wednesday. The members of the FOMC, who meet every six weeks, have been offering interim guidance on when and how ‘tapering’ will come into effect. These clues as to what stance the official statement will take have been helpful, but events are moving on to the far more significant release of the statement and the answers which follow in the Q&A session.

The Fed meeting is always a big event for the markets, but this one is keenly anticipated, and current price moves in equities give a clue to what the markets are already pricing in.

Source: CNM

FOMC – A Surprise to the Upside?

The equity markets have recently had a stellar run. Between the Wednesday 13th and Friday the 29th of October, the Nasdaq 100 and S&P 500 indices posted only two down days. Strength in equities represents a shift into risk-on assets. It suggests investors believe that the much talked about tapering may not be introduced as hard or fast as previously feared.

This school of thought points to the recent US jobs numbers, which were largely disappointing.

At the start of October, risk appetite was scaled back due to an apparent willingness of the Fed to tolerate some degree of unemployment as being built in. At that time, Fed Chair, Jerome Powell, said it would now only take a “reasonably good employment report” for him to hit the trigger to taper bond purchases. He continued, “many on the committee feel the test has already been met”.

The willingness of the Fed to administer tough medicine to the US unemployed has faded through October. The Non-Farm Payrolls report out early in October was a long way from being a “reasonably good employment report,” and jobs growth numbers continue to disappoint. Analysts had predicted 500,000 new positions would be created in September, but the actual number was a long way off that at 194,000.

Nasdaq 100 Index – Daily Traditional Candlestick Chart & Doji Candle

Source: IG

Nasdaq 100 Index – Daily Heiken Ashi Candlestick Chart & Doji Candle

Source: IG

The traditional candlestick price chart points to the major equity indices stalling in the run-up to Wednesday’s announcement. Whisper it, but there are doji candles on the daily chart. The Heiken Ashi chart over the same timeframe can be seen as a better guide of momentum in the market, which is still forming a bullish pattern. Some hesitancy in the run-up to the Fed statement can only be expected. However, momentum indicators are raising the idea that the Fed’s announcement will be met with party poppers and buy trade instructions.

Final Thoughts

Jerome Powell won’t need to beat himself up too much on Wednesday if he can’t resist the temptation to continue pumping the US economy with free money. Ever since the term the Greenspan Put came to be widely used in the markets, it’s been easier for the Chair of the Fed to keep the taps running. On a short-term timeframe, the central issue for anyone looking to buy into the rally would appear to be whether the good news relating to tapering has already been priced in.

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