Risk Aversion Ahead of the Fed

We’re seeing a little risk aversion in the middle of the week as investors await some big earnings and more reassuring words from the Federal Reserve.

It’s a jittery moment for markets at the start of the year, with investors craving constant reassurance that the rug won’t be pulled out from beneath them by the central bank. It’s nothing to be overly concerned about at this point but it does highlight the need for the Fed to tread carefully.

I don’t think it helps that there’s so much bubble talk at the minute, given everything we’re seeing in bitcoin and, more recently, stocks like GameStop and AMC. I’m not sure either of these are necessarily a sign of bubbles, rather the power of social media and ease of retail trading. That’s not to say we won’t see painful lessons for some in these areas.

The overall market may be experiencing a minor pullback, though. Despite the Fed’s best efforts to talk up the economy and down the prospects of tightening, investors just aren’t biting. Perhaps this is one sign of slight frothiness in the market but I don’t think it will take much to turn that around. A small pullback in the near-term could be healthy though and not anything to worry about.

The Fed will have another stab at this later in the US session and will be all-too-aware of its need to tread carefully, given the fragility we’re seeing in the market. I highly doubt we’ll see any attempts to hint at an early exit from easy monetary policy given the significant efforts over the last year to convince investors they’re going to remain supportive for some time and longer than they would in the past. It seems needlessly counterproductive.

Major earnings after the US close may also be contributing to the more cautious approach that we’re seeing in the middle of the week. Apple, Facebook and Tesla will all report numbers later and they certainly have the power to get investors back on board or running for the exits.

There is another explanation. There were a number of major risk events at the back end of last year and all came to a positive conclusion that contributed to the strong run we saw in markets in November and December. We could literally just be seeing that running on fumes and the current Covid situation creating near-term uncertainty. It would be perfectly natural for investors to be taking a breather under the circumstances. And stories like GameStop provide a convenient distraction in these times.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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 BNN. 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