Can the Fed salvage the Santa rally?

Can the Fed deliver a late festive surge?

US equity markets are poised to open a little higher on Tuesday, paring losses on another bad day for Wall Street but how long will it last?

There is a lot of pessimism in the markets right now and while the Fed – or more accurately, it’s Chairman – may have been the trigger, I wonder whether they may be nothing more than a scapegoat, with his comments being the straw that broke the camel’s back. Powell has since dialled back – or clarified – his hawkish views on interest rates and yet, the sell-off continues.

There was no pessimism earlier in the year, despite expectations of a December hike and more next year generally existing. Now we find ourselves in a situation whereby a hike tomorrow is not fully priced in and, if it does happen, no more are priced in for 2019. And still, the sell-off continues. It’s for this reason that I wonder whether there’s anything the Fed can do tomorrow to salvage the Santa rally that’s so far eluded hopeful investors.

A not so “Silent Night” in the markets

Weak sentiment takes its toll on oil

Stocks have not been the only victims of broader market misery this festive season. Oil tumbled on Monday as equities plunged into the red as investors continue to view 2019 as a challenging year for global growth. OPEC may have come to an agreement with its allies to cut production next year and rebalance markets on the back of prices slipping by more than a third since October, but traders are clearly not convinced enough will be done.

A number of different scenarios could threaten the success of the deal including slower global growth, low compliance and higher US production. It may be reasonable to argue that many people doubted the group’s efforts last time as well, which by and large was very successful, but the environment has changed and no one seems in any rush to say with confidence that the result will be the same. The global growth situation is a major factor that the group did not have to content with previously, as well.

DAX recovers after rough start to week, Fed rate announcement eyed

Gold pushes higher on weaker dollar

Gold is on the rise again having survived attempts to push back below $1,240 at the back end of last week and early this. A combination of risk aversion and a weaker dollar are proving supportive for the yellow metal which has been on a good run since the summer. With the Fed meeting today and tomorrow, after which a decision on interest rates will be announced alongside new economic projections, the greenback could be very volatile which will strongly influence the direction of travel for gold.

 

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A dovish hike seems to be the base expectation in the markets, alongside projections that confirm a slowdown in the US next year. As ever, the dot plot will be central to the reaction, with markets pricing in a 60% chance of no hike next year. I don’t think the Fed will pare back its expectations that much, having previously factored in three for next year. The question now is how dovish the central bank will be and how much it will align with markets.

Source – CME Group

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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