The
countdown of the main event in this season has begun as the Federal Reserve
(Fed) starts its Federal Open Market Committee (FOMC) on Tuesday and will
announce its tapering decision on Wednesday. Investors are waiting for the Fed
to turn the page of savage mega stimulus measures to prompt inflationary growth
and return towards normalising monetary policy.
It is worth
noting that the start of the tapering of a massive amount of $120 billion a
month on the Treasuries and mortgage bond buying program under the current
circumstances may not necessarily lead to a significant drop in the stock
market in the United States.
We may
recall that in November and December, 2018 the S&P 500 broad market index
collapsed by 20%. The Fed started to raise interest rates from 0.25% in
December 2015, and investors were not troubled by this set of rate hikes in any
way until the monetary regulator announced in early 2018 that it would hike
interest rates every two months. This moved the interest rates from 1.5% to
2.5% by December 2018 and this triggered the collapse of the S&P 500 index.
Now we have
the tapering instead of interest rates hikes, but the logic remains the same. What
is important is not the tapering itself, but the speed of this process. If the Fed announced that tapering
will begin with $15-20 million per month with dovish comments that the speed of tapering
is not carved in stone and is not related to the interest rates hikes, than the
market may accept it as a positive signal for a rise in rates over the next
coming months.
Stock
indexes may perform a correction just after the announcement of tapering with the
S&P 500 index declining to the support at 4530-4540 points. If the index remains
above this level, together with the strong desire of traders to get rid of
Treasuries while the Fed is still buying them, we may expect a strong Santa
rally. If the index rises above 4620 points it may go even further up to 4700
points.
We may see quite
a different story if the Fed announces the tapering of $30-35 billion a month.
Then it would be hard for stock markets as the S&P 500 index may plunge to
4495 points and may clear the path to a more significant correction. This
scenario is not very expected, so it could be considered as an alternative and
not the primary one to come true.
For other
markets the FOMC meeting is also a milestone event of the week. However, crude
has its own story too, as OPEC+ will have a meeting to decide on further oil
output increases. No surprises are expected as investors await another rise of 400,000
barrels per day in oil production starting from December 1. So, formally crude
prices may have a support from this side. A bitter pill for the market has been swallowed in the
form of the request by U.S. President Joe Biden for an increase in oil
production. This request comes just before the decision of OPEC+ on whether the
group will moderate the increase of oil production. If this is the case,
gasoline prices may rise even further. Even though this could be the case, the U.S. administration may take some actions regarding lowering oil
price. So, we need to assess the next move by OPEC+ and how the Biden Administration will react. So far,
OPEC members are mostly rejecting Biden’s call.
Gold prices may still
climb to $1840 per troy ounce if the Fed does not announce faster than expected
tapering amounts. Gold prices may test this ceiling, but it would be hard to
expect any further rise. Fed’s tapering is a long story, and it would pressure
gold prices starting this December to $1650 per ounce.
Forex is bracing for the
FOMC meeting. EURUSD is going to keep its upward correction pattern to 1.16300
and 1.17500 confirming dovish intentions of the Fed. The pair is supported at
1.15400 and will not likely break through this level as long as the Fed is
holding to the dovish tapering scenario. In case of the alternative scenario,
the pair may plunge to the 1.1200-1.1300 by the end of next week.
GBPUSD has its own
game as the Pound suddenly turned weaker with a descending trend. This week’s
support for the Pound is at 1.35700. If the Bank of England (BoE) fails to
support the Pound it may plunge towards more sensitive levels below 1.3500.
British media led by the BBC are calling on the BoE to start an interest rate
hike in order to tackle high inflation. If the BoE accepts their call the Pound
may reverse to 1.38000-1.38500 against the Dollar, restoring its upward trend.