Markets braced for FOMC meeting

Overview
Equities continued to decline, albeit at a slower pace as the markets switched to a ‘wait-and-see’ mode ahead of the Fed’s Federal Open Market Committee (FOMC) policy meeting this week……

ETF Securities Research

Commodities generally had more mixed performance, with precious and industrial metals rising in the first part of the week before being weighed by the deliberations of the Fed. Some investors saw the budgetary compromise approved by the House of Representatives as another reason for the Fed not to wait till 2014 to taper its bond buying programme. Strong retail sales numbers also pushed more investors into that camp. We believe that the Fed is still looking for a broad range of indicators to be positive before it changes its policy direction and would rather wait for further confirmation of stability in the beginning part of 2014.

Commodities
Natural gas prices surged to a two-year high, as natural gas inventories fell to 81 billion cubic feet (bcf), 3.5% below its 5-year average. A colder-than-expected winter snap has led to a substantial increase in Northeastern price points and a 33% increase in natural gas consumption compared to the week before. At the same time, supply of dry gas fell by 3.3% following well freeze-offs. The US Energy Information Administration (EIA) expects this winter to be colder than the last, which could lead to persistently higher gas prices this season. A number of softs rallied with cotton gaining 6.7%, coffee rising 5.0% and cocoa 1.3%. After net speculative shorts came close to a ten-year high in November, coffee prices were aided by a short-covering rally. Whether the gains will be sustained will depend on whether the on-going Colombian harvest can stop outshining initial expectations and if Brazil can slow down exports.

Equities
Equities continued to decline, albeit at a slower pace. Most equity benchmarks declined less last week than the week before as markets switched to a “wait-and-see” mode ahead of this week’s FOMC meeting scheduled for this Wednesday. European short equity indices rose 1.6% on average compared to a gain of 7.8% on average the week before. The Russell 2000® Index dropped 1.7% over the past week. Some investors saw the easing of budgetary frictions as another reason for the Fed not to continue to buy bonds at the same pace, while others point to the relatively tame inflation numbers as a reason not to taper their activity too quickly. Volatility is likely to rise following the meeting as the market should gain some clarity following the FOMC’s decision.

Currencies
Pro-cyclical currencies slide on expectations of additional central bank easing as FOMC comes into focus. Expectations of further rate cuts from the Riksbank (the Swedish central bank) and the Reserve Bank of Australia (RBA) led to the Swedish Krona (SEK) and the Australian Dollar (AUD) being the worst performing currencies last week. The downward trend for both currencies is likely to continue in coming weeks as central banks reaffirm commitment to supporting their domestic economies. The Riksbank is widely expected to cut official interest rates at its upcoming meeting. Meanwhile, while the RBA is not about to cut rates, it is becoming increasingly vocal about the strength of the AUD with the central bank Governor even suggesting that 0.85 is ‘closer to the mark’ than 0.95 for AUD/USD. All eyes will be focussed on the FOMC meeting this week for clues to the timing and magnitude of tapering and any hints from Bernanke will be supportive of the US Dollar across the board, especially in light of ongoing strong indications of a robust rebound in economic activity.

Source: ETFWorld.co.uk

Commodities Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.
Equities US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.
Currencies Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.