HomeContributorsFundamental AnalysisCAC Gains Continue Ahead of Fed Rate Statement

CAC Gains Continue Ahead of Fed Rate Statement

The CAC index has posted gains for a second straight day. In Wednesday’s North American session, the index is trading at 5191.00, up 0.53% on the day. On the release front, there are no events out of the eurozone. In the US, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%.

The CAC is moving higher on Wednesday. Financial stocks continue to climb, led by bank stocks. BNP Aribas has gained 0.78%, while Credit Agricole is up 0.77%. BNP Aribas will be in the spotlight on Friday, as the bank releases its interim 2017 earnings report. The week started out on a strong note, as French Manufacturing PMI improved to 55.4, its highest level in three months. Although Eurozone Manufacturing PMI was softer in July, dropping from 57.3 to 56.8, it still pointed to solid expansion. The eurozone and French manufacturing sectors have received a boost from stronger exports as well as increased consumer demand. Improved economic conditions in the eurozone have boosted the euro, which has jumped 9.8% against the dollar since March 1. However, the high exchange rate has weighed on exporters’ shares, such as automobile makers. The CAC has shown only marginal gains since April 1.

All eyes are on the Federal Reserve, which concludes its monthly policy meeting later on Wednesday. The Fed is not expected to alter its interest rate policy, but the rate statement could still be a market-mover. The rate statement will be under careful scrutiny, as analysts will be looking for any references to the "I" word. Inflation continues to hover around 1.4% (based on the Fed’s calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as "transitory", but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today’s rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.

Aside from interest rates, Fed members will be discussing when to commence tapering the Fed’s $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.

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