Be Careful What You Wish For!

Today is the day the market has been looking forward to for some time.  The Federal Reserve will inform the markets of its latest interest rate decision (8:00 pm CET today).  I have been in the markets since 1983 and don’t recall a point in time when we had full employment and record high stock market prices, and the Fed was expected to cut rates by 1.00% over the next 12 months.  The market experts are comparing the current situation to the Greenspan led Fed in 1995, but there were differing circumstances even though the cuts both appear to be “insurance” related.

This will be the first rate cut in over 10 years!

Why is this the case?

  1. Politics have taken over the Fed’s independence?
  2. The Fed, unable to meet its inflation target is panicking perhaps?
  3. The cut is an insurance policy against the dreaded trade wars?
  4. Better early than late……

It seems the Fed has gone from being data driven and reacting to economic developments, to focusing on sustaining economic growth at all costs.

So where do we go from here? (our best guess probability)

  1. Fed cuts .25% and says data will drive them going forward (bearish for equities, bullish for USD)  25%
  2. Fed cuts .25% and strongly hints that more is to come. (neutral to slightly positive for equities, slightly negative for USD) 50%
  3. Fed cuts .50% and says on hold for the foreseeable future. (small positive for equities, slightly negative for USD)  10%
  4. Fed cuts .50% and says more in the pipeline.  (positive equities, negative for USD)  10%
  5. Fed does nothing, but strongly dovish message given and that cuts are coming. (negative for equities, positive for USD) 5%

Other interesting events:

*Brexit process is driving the GBP weaker.  No Deal Brexit looking more and more the high probability outcome or is this a high level game of chicken we are seeing played out in front of us?

*Several media outlets are sending signals that the market should not expect any big news from the U.S./China trade negotiations this week.

*China Manufacturing continues to fall – PMI came in at 49.7

*North Korea fires more missiles.

*Apple beats analyst expectations and gives positive guidance, surprising the market.

Key Charts for us at Minter:

The VIX volatility chart held the crucial support level at 12 and is now trading at just under 15.  Market is naturally a bit nervous before the Fed today!

The S&P is holding near its highs through the reporting season, the Fed will need to deliver to avoid a dip!

We are still positive to gold and would expect a break above resistance if the Fed is aggressive tonight.

Crude oil is holding in its consolidating pattern.  We will look to trade a breakout.

USD is holding around the 97.50 level in the index.  The Fed will drive the next move tonight.

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