Stocks Trading Slightly Better Ahead of Fed Announcement

James Hyerczyk from ForexHound.com at 01/27/10

U.S. equity markets are trading flat to better ahead of this afternoon’s Fed interest rate policy announcement.  Traders will most likely be focused on whether the Fed votes to extend or end its mortgage buyback program as this will have a direct effect on the U.S. housing industry. 

If this announcement turns out to be a non-event, then stocks could feel pressure as the focus will shift back to the possible developing slowdown in the global economy.  This news has been causing traders to take risk off the table as traders seek shelter in lower risk assets.

Treasury futures are trading flat to higher. Look for Treasury futures to rise if the Fed votes to extend its mortgage buyback program.  This stimulus measure has kept pressure on interest rates.

The direction of February Gold will be dependent on the direction of the Dollar. A stronger Dollar will put pressure on precious metals. Any hint at higher interest rates is likely to drive the Dollar higher and gold lower.  A surprise announcement about inflation will underpin gold, but this is a remote scenario.

March Crude Oil is under pressure overnight. Demand for safer assets is pressuring commodities and stocks. Investors are focusing on a possible slowdown in the global recovery which will lead to a drop in demand for petroleum products.

The U.S. Dollar is trading flat overnight against most major currencies ahead of this afternoon’s Fed FOMC announcement.  Many of the markets are trading inside of yesterday’s ranges, driven primarily by position squaring as traders try to assess the Fed’s next move.

The consensus says the Fed is likely to acknowledge that economic growth has accelerated since its last meeting in December but risks still exist to the economy because of tight credit conditions and unemployment.  Based on the evidence that the Fed is pouring over, look for interest rates to remain low for “an extended period”.  The FOMC will continue to monitor U.S. economic data for signs of a sustained recovery that will stimulate jobs growth without triggering high inflation.

Like previous FOMC meetings, the markets will focus on the phase “an extended period”. At this time, this probably means 6-9 months.  Taking out this phrase or altering it will be a signal that the Fed is getting ready to act sooner than previously estimated. This news will move the markets substantially and most likely trigger a rally in the Dollar while putting pressure on Treasury futures. Equity markets could have a knee-jerk reaction to the downside before stabilizing.

Since its last meeting in December, a couple of regional Fed presidents have gone on record expressing their concerns over the current mortgage-backed securities program. This stimulus measure is expected to end on March 31, but St. Louis Fed President Bullard wants to extend the program while Philadelphia Fed President Plosser says it should end on time.

The mortgage buyback program has helped reduce mortgage rates 0.25 to 0.75 which has helped stabilize the U.S. housing market.  Ending the program prematurely could stall the housing market recovery. The key is to end the stimulus measure without knocking the housing market recovery off course.

The focus of this Fed announcement may shift from “when” interest rates will begin to rise to will the Fed’s ending of its mortgage buyback program stifle the economy enough to knock the housing market off its path to recovery. Traders should watch for a two-sided move following the announcement as some traders will focus on the “extended period” language while other will focus on whether or not the Fed ends or extends its mortgage buyback program.

The March Euro is trading higher while sitting inside a tight range. The recent bottom at 1.4027 was tested successfully. The current chart pattern suggests the daily trend will turn to up following a breakout over 1.4193.

The series of inside moves the past three days is likely to make the March British Pound the most volatile market. For the past few days, this market has been establishing support inside a series of retracement levels. A strong breakout to the upside is likely to trigger a near-term rally to 1.6351.  A break to the downside targets 1.5890.

Demand for lower yields triggered by a possible slowdown in the global economy continues to support the March Japanese Yen. Light buying came in last night when this market tested a major 50% price level at 1.1227.

The March Swiss Franc is trading stronger after failing to accelerate through the last swing bottom at .9530. In addition, this market is nearing the December bottom at .9522.  Both prices are potential breakout areas.  On the upside, a new main top has been formed at .9647.  A trade through this level will turn the main trend up on the daily chart.

The March Canadian Dollar is trading inside of yesterday’s range, which could be a sign that downside momentum is weakening.  A break through .9425 will be a sign that this market is getting ready to rally after a prolonged move to the upside. Crude oil, gold and equity markets could have a big influence on this market today after the Fed announcement.