Federal Reserve's meeting could trigger stock sector rotation

Investor Signposts Week Beginning September 18 2017
World Week Ahead: Eyes squarely on Fed

21 September, 2017

The yen's recent drop against other currencies, such as sterling, has had some spillover impact and lent added support to the dollar versus the yen, traders say.

CENTRAL BANK WATCH: In Europe, investors are monitoring a speech by Bank of England Governor Mark Carney for confirmation that the bank expects to raise interest rates in coming months for the first time in a decade.

The pan-European Stoxx 600 edged down by around 0.21 percent shortly after the opening bell, with nearly all sectors and major bourses in negative territory.

The ICE U.S. Dollar Index DXY, -0.12% which measures the greenback against six of its rivals, was little changed on Wednesday morning at 91.767, on course for a second session of losses.

With CME group's FedWatch tool now placing the odds of a December rate hike at about 50% Investors will be also be looking closely for any hints from the bank regarding its interest rates plans as a more hawkish outlook from the Fed could bolstered the US Dollar as markets price in a rate hike at the end of the year.

Markets have priced in a zero chance of change to US interest rates, but near-certainty to the Fed beginning to unwind its $4.5 trillion balance sheet, a process it previously said it would begin "relatively soon".

CME's FedWatch tool now places the odds of a December rate hike from the Fed at about 50/50 so the tone of this week's meeting could have considerable impact on US Dollar sentiment, especially should the Fed remain committed to one final rate hike in 2017.

Economists and investors are divided over the likely outcome as well, with different analyses of the market price for federal funds futures contracts putting the likelihood of a rate hike in December as low as 43 percent and as high as 56 percent.

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On Thursday, the Bank of Japan will also hold a regular policy meeting, and is widely expected to maintain the status quo as inflation remains stubbornly weak despite a modest economic recovery.

Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in NY, said "the primary reason US yields are creeping up is that thinking about it clearly, the market has decided that the Fed is unlikely to change the December 2017 dot - still saying they expect one more rate hike in 2017". The comments were made ahead of U.S. President Donald Trump's first address before the United Nations on Tuesday as foreign leaders gather in NY to discuss how to deter North Korea from enhancing its nuclear capability.

Currency markets had a muted reaction to Trump's latest comments on North Korea. Gold hit a 2-1/2 week low, with spot gold XAU= down 0.6 percent at $1,311.51 an ounce. Whilst the speech earlier today didn't have much of an effect on currency markets, if there was an escalation between the USA and North Korea there would definitely be volatility.

The U.S. 10-year Treasury yield had reached a one-month high of 2.237 percent on Monday.

'The Fed won't want to commit to another rate hike until it is sure that activity is rebounding after the storm disruption'. On Friday, it had risen to as high as $1.3616, the strongest since June 24, 2016. The euro strengthened to $1.1968 from $1.1945.

In the NY session, US existing home sales data for August and crude oil inventories data are slated for release.

Regarding commodities, oil prices were in an uptrend during the Asian trading, with WTI crude rising by 0.52% to $50.15 per barrel and Brent being 0.13% higher at $55.69.

Shanghai gained 0.1 percent, while Singapore and Sydney each gained 0.2 percent.

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