The week’s headline event is almost upon us and stock markets are waiting anxiously for the outcome, with the Fed decision just hours away.
It all seems very dramatic, arguably overly so. We had a slew of earnings reports on Tuesday with Apple, Microsoft and Alphabet among them, and yet we’re still seeing extreme caution in the markets ahead of the proceedings later on today.
It’s being hyped up so much, I can’t help but feel it’s going to be a huge anticlimax. Given how the data is performing – talk of peak recovery – the believed transitory nature of the inflation numbers and the surge in Covid cases as the next wave takes hold, it seems highly likely that the Fed is going to kick the can down the road.
Unless policy makers are starting to question the transitory nature of the inflation data we’re seeing, there seems little reason to risk a taper tantrum in the markets when solid progress is being made. Clearly it’s coming soon but the Fed can afford to act with caution. The question is whether they will signal when it is likely, if not in the coming months and how investors will take it.
Knockout earnings from big tech
As it turns out, the Fed announcement is somewhat overshadowing earnings season. We saw some incredible numbers once again from the big tech names on Tuesday, and while Alphabet is getting some love pre-market, the reaction hasn’t been what it arguably should be. Maybe that’s the Fed, perhaps we’ve just come to expect so much that blowing away estimates is the norm now.
The global chip shortage that has hampered many companies may be part of the reason behind Apple and Microsofts muted response to earnings. That will pose a challenge in the current quarter, while economic reopenings and the return to work may also make life more challenging for the companies than it’s been this last year.
Facebook, Paypal and Pfizer among those reporting today so there’s still plenty of action to come.
Oil creeps higher after API report
Oil prices are edging higher but just like other risk assets, moves are fairly muted and have been for days. The API on Tuesday reported a larger draw than expected from the EIA release which will further put at ease any concerns at all around last week’s build, not that there really was any. But another build this week may have got people asking questions. Should EIA report along the same lines today, prices should remain well supported.
Ultimately though, it will probably all come down to Powell and his colleagues. If they pass the dovish test, we could see further gains in crude prices. Taper talk will take the wind out of the sails and could trigger some profit taking.
Gold awaiting Fed catalyst
No instrument needs the Fed decision more than gold. It’s been in consolidation since the start of the blackout period, floating around $1,800 and waiting patiently for the next catalyst. Even if the Fed turns out to be a massive anticlimax, we should get some movement in gold again.
A dovish Fed and lower yields could see gold heading for the recent highs around $1,833, at which point it will face the same 50 fib test it failed before (June highs to lows). A move above here would draw attention to the 61.8 fib which falls around $1,850. A break of this would be very bullish.
Should the Fed not perform, then those June lows could come into focus before too long. Immediate support comes around $1,790 but given that it’s hovered around these levels for the last week and a half, it may not take much for that to collapse.
To the moon?
Bitcoin is back above $40,000 and crypto bulls clearly couldn’t care less about Amazon’s denial of the stories that were “leaked” earlier this week. We’ve seen this so many times before. When sentiment shifts in the crypto space, good news and rumours gets a big response and no one cares about the rest.
Cryptos have had a hard time since the heights they reached in April but something tells me that’s changed. Elon saved the day, disclosing things that almost everyone would have assumed to be true anyway and now the floor at $30,000 looks more solid than ever. If bitcoin can break the late May/mid June highs, it could take off once more.
