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Afternoon brief
Market paralysis has started to set in ahead of the Georgia run-off and the release of the FOMC meeting minutes on Wednesday. The trading action has settled down significantly after the market saw volatile price movements in US stocks and the US dollar on Monday.
Residence of Georgia our now out voting, and the results of the run-off should be known during the early hours of Wednesday morning. Fears that the race is going to be a lot closer than previously thought had caused traders and investors to re-price a number of financial instruments, hence the volatile moves on Monday.
European equity markets have traded with a cautious tone this morning, and this theme is expected to spill over into the US trading session. The CAC40 has been notably weak this week, as bearish COVID-19 infection news in France continues to harm local stocks.
The FTSE100 and the Ger30 have been largely flat and have managed to hold up well due to positive economic data, and news of government support. The FTSE100 held steady in the face of the new UK national lockdown, as Finance Minister, Rishi Sunak, announced further business grants and support for small business.
Better-than-expected retail sales data from the German economy has also helped to steady the German DAX. December retail sales outpaced expectations, at +1.9%, while German unemployment unexpectedly fell in December.
The solid unemployment numbers underscore the robustness of the German economy during the COVID-19 pandemic. December export data from Europe’s largest economy will be a big economic data event to watch out for later this month.
Traders now look to the release of ISM manufacturing report, which now has some lofty expectations against it after yesterday’s bumper US manufacturing PMI. Expect to see the greenback giving back gains if the ISM comes in under expectations.
FOMC Preview
The FOMC meeting minutes is not expected to throw up too many surprises tomorrow, however, economists are taking the event seriously, hence traders and investors are paying close attention.
During last month’s policy meeting the FED offered additional forward guidance on asset purchases without changing the size or composition of the purchases. This implies that the central bank is comfortable with monetary policy at the moment.
Credit Suisse recently sent out a compelling investment note this week, stating that “The Fed is ready to ease more if financial conditions tighten, but with markets calm and recently passed fiscal relief there is not much more for them to do to support the recovery”.
This is certainly true, and the fact that a stimulus bill has recently been passed means that the overall urgency to act has been lessoned somewhat. However, politics and rising tensions could cause the market to place more pressure on the FED to offer yet more stimulus.
Hypothetically, market calm could quickly go away if we see a blue wave in US senate, raising the possibility of serious US dollar weakness, and a temper tantrum for US stocks, meaning that the Federal Reserve may have a new problem on their hands.
It should be noted that the situation with COVID-19 infections has got worse since the last meeting, and more lockdowns could cause the FED’s underscore that they have the power to act, and to off more support if needed.
Overall, the minutes are likely to underscore that Q4 is likely to remain in place for some time and as Federal Reserve member Charles Evans mentioned yesterday, markets will have to get used to low interest rates.
