HOW WILL THE MARKETS RESPOND? FOUR WAYS TO TRADE FED DECISION

Who has been buying in the last couple of weeks? Maybe those that are hopeful the Fed will keep rates artificially low are buying ahead of that awaited announcement? Or are people are buying for no other reason than others are buying? It is really hard to predict the market movements after the Fed announcement. But analyst Jani Ziedins projects four possible outcomes and four possible ways to trade them:

1) Rally after hike

This is a bullish signal as it tells us the market no longer cares about China or rate hikes. Everyone who is worried these things sold weeks ago and when there is no one left to sell a headline, it stops mattering.

2) Selloff after hike

Over the medium-term this is a bullish outcome because the rate-hike discussions and lack of confidence are finally over. While the knee-jerk reaction was to sell the news, a 0.25% jump in short-term interest rates will not have a material impact on the U.S. economy. There will be plenty of value oriented buyers ready to jump in and snap up discount shares from fearful sellers. While it is possible to slide to the lower end of the trading range, even undercutting the 1,860 lows, the Fed hiking rates tells us they believe in this economy and so should we.

3) Rally after no hike

This will mark a temporary relief rally that will fade. Postponing the rate hike by six or twelve weeks will not make much of a difference and isn’t something to be happy about.

Jani says he would be worried over the Fed not hiking rates because it would mean they think they economy and stock market are too vulnerable to handle such a nominal rate increase. If they’re worried, then investors should also be.

4) Selloff after no hike

A collapse following good news will signal to stay clear of this market, says Ziedins. If the central bank doesn’t believe in this market, we could smash through the lows.

The situation is further complex because the cloud of rate hike uncertainty continues indefinitely. The market can handle bad news because it is quantifiable. This uncertainty and indecision is what really drives it crazy.

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YEN HIGHER AS BANK OF JAPAN STANDS PAT

On Thursday the greenback edged lower against the yen after the Bank of Japan decided to stand pat on the monetary policy which spurred demand for the Japanese currency.

In a widely expected move, the Bank of Japan’s nine policy board members voted 8-1 to maintain the policy of buying assets at an annual pace of ¥80 trillion. The BOJ last raised the purchase amount in October.

The yen was boosted by the news with the greenback last seen at ¥119.59, lower 0.52%. That compared with ¥120.23 late Monday in New York.

The U.S. currency was higher against the euro, which was at $1.1300 midday from $1.1315 late Monday.

Takuya Kanda, senior researcher at Gaitame.Com Research Institute, said he did not expect such a reaction. He said he had felt expectations for BOJ easing were mounting from earlier this morning, as indicated by a rise in the benchmark Nikkei Stock Average.

After rising 2.0% in mid-morning, the Nikkei trimmed most of its gains, and was up only 0.2% immediately after the BOJ decision. The index was last up 0.9%.

Elsewhere in the currency market, the Australian dollar was weaker at $0.7107 and ¥85.52 midday from $0.7138 and ¥85.19, respectively.

The Aussie gained earlier in the session as investors viewed the country’s new prime minister as positive. Malcolm Turnbull, a 60-year-old former investment banker, will succeed Tony Abbott.

However, the local currency turned down after the Reserve Bank of Australia issued the minutes of its Sept. 1 policy meeting, at which it maintained a neutral tone on the outlook for interest rates.

The euro was at ¥135.47 from ¥136.08.

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GOLD PRICES QUIET AHEAD OF FOMC; U.S. STOCKS LITTLE CHANGED AT OPEN

Gold prices are slightly higher in subdued early U.S. trading Monday.

Analysts have seen some light short covering in the futures market and bargain hunting in the cash market. At the same time, many market players are standing on the sidelines before this week’s highly-anticipated FOMC meeting.

December Comex gold was last up $1.50 at $1,104.80 an ounce.

December Comex silver was last down $0.12 at $14.385 an ounce.

The Federal Open Market Committee meeting on Wednesday and Thursday is the epicenter of attention this week.

A statement and press conference from Fed Chair Janet Yellen are set for Thursday afternoon.

Market analysts have not come to a consensus on whether the central bank will make an interest rate hike for the first time since 2009 at this week’s meeting, or wait until December, or next year.

The U.S. Fed funds futures market presently suggests the Fed will not make a rate hike in September.

Asian stock markets were weaker overnight, as there was more mostly downbeat economic data coming out of China.

China’s industrial output in August was up 6.1%, year-on-year, which was better than July’s 6.0% growth, but lower than the consensus forecast of up 6.6% for August. Fixed asset investment in China during January-August was also lower than expected. However, China’s retail sales in August were higher than expected.

China’s Shanghai gauge was down 2.7% Monday and Japan’s Nikkei stock index was down 1.6% on the day.

U.S. stocks opened little changed on Monday. The S&P 500 opened flat at 1,960. The Dow Jones Industrial Average opened unchanged at 16,427. The Nasdaq Composite began the day up 6 points, or 0.1% at 4,828.

In other news Monday, industrial production in the Euro zone rose 0.6% in July from June and was up 1.9% on the year, which was better than expected.

The dollar was mostly higher against its rivals with EUR/USD plunging 0.28% to 1.1307. GBP/USD hit 1.5396, lower 0.19%.

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HOW TO TRADE NEWS EVENTS: ECONOMIC RELEASES THAT MOVE US DOLLAR

How the market reacts to economic releases is generally determined by two factors:
How important the market considers a particular release to be.
How close to market estimates the number comes in at.
How important the market considers a particular economic release to be, is something that changes over time depending on what is happening from a US Dollar fundamentals standpoint. If there are worries that the economy is going into recession, then the market is going to be extra sensitive to any numbers, such as non farm payrolls and consumer spending, which may provide early warning signs that this is the case.

The most market moving indicators, in order of importance are:

Non Farm Payrolls
FOMC Releases
Retail Sales
ISM Manufacturing
Inflation
Producer Price Index
The Trade Balance
Existing Home Sales
Foreign Purchases of US Treasuries (TIC Data)

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