Ain’t nothing but the Fed today. It is all but certain to raise rates by 0.25 percentage points but the complacency we see sets up for a volatility-driven event if Powell pushes back hard – and why not? There is no reason for the Fed to signal a pause – financial conditions have loosened considerably, inflation remains high, the labour market tight and commodity-linked inflation could be rearing its head again. However, as we have seen countless times, the market is willing to take a dovish read to just about anything the Fed says.
The sharp moves of the last two days on Wall Street indicate we are in the kind of market that will chop both bulls and bears, with the S&P 500 jumping almost 1.5 per cent yesterday after a similar move to the downside on Monday.
BNP Paribas says the decline in volatility has meant algorithms are driving the rally. So stocks are up not because “investors” are more bullish but because the decline in volatility (VIX still sub-20) has triggered the algos to buy. What happens when the volatility returns?
Dow closed up 1.1 per cent at 34,086, the Nasdaq Composite added 1.7 per cent to 11,585 and the S&P 500 rose 1.46 per cent to 4,077. Whilst we have seen the market rally strongly in January – the S&P 500 +6.2 per cent, the Nasdaq +10.7 per cent, the indices are yet to break above the Nov/Dec peaks. Breadth is there but conviction seems to be lacking and the market is now a lot less cheap than it was a month ago and earnings are about to become a headwind. Still see the ‘oversold’ speculative tech doing well with ARKK up 31 per cent this year, with Tesla up another 4 per cent to leave it up 60 per cent YTD in what has been a staggering rally for the stock over the last month.
We are seeing a sideways chop in Europe too, with the FTSE 100 rejecting 7,700 yesterday to trade up towards 7,800 today; but it broadly remains within the range of the last fortnight as investors search for more direction. Continued drift higher from the lows last week could see the FTSE take a look at the Jan 23rd high at 7,811.
Best of the rest
Data – China Caixin Manufacturing PMI contracted for the sixth month in a row, declining to 49.2. EU inflation due at 10am, seen at 9.0 per cent from 9.2 per cent prior, with core declining to 5.1 per cent from 5.2 per cent.
In FX, USDJPY continues to sit at 130, EURUSD is firmer towards 1.0890 and GBPUSD has held steady above 1.23 this morning after taking a 1.22 handle at one stage yesterday. Lots of sideways chop until the Fed and BoE/ECB shake out today and tomorrow. Watch for significant moves around the meetings, particularly in GBPUSD, EURUSD and EURGBP.
Neil Wilson is the Chief Market Analyst at Finalto
