The FED did not deliver another sugar hit to markets with all sectors in the US closing in the red, buying did come back into the market reversing much of the sell-down.
The FED is predicting inflation to be 3.4% this year well above their normal average target of 2 percent. With rates likely to remain near zero until 2023 where they may increase rates two times. This is one year earlier than what they had been predicting. The FED also did not give any real pathway forward on how much and when they will taper bond buying.
The Positives for the markets; the FED is remaining extremely accommodative despite the expectations of high inflation. If inflation remains high, it will help the FED meet its long-term average targets of 2%. Do not forget we are just coming out of a period of deflation. With rates remaining low we are likely to see the company buy back shares again similar to what we saw in the QE periods after the GFC.
The Negatives for the markets; markets thrive in a period of certainty. The FED not giving a clear timeline and warning not to listen to the dot plots leaves investors guessing on when they will taper and increase rates. Economists also often get predictions wrong, many investors are worried inflation will jump to a point where the FED will need to take action. Selling in bonds saw yields jump strongly, we will need to keep an eye on this space. If the US 10-year yield breaches the recent highs at 1.78% we could see equities markets also sell-off.
Overnight Base Metals took another strong hit, this is likely a combination of FED uncertainty and China which is trying to crack down on speculators bidding commodities prices higher. Iron Ore port prices came off, but are still very high at 214.08 US a tonne.
The XJO is expected to open flat this morning despite both strong falls in the U.S overnight and their negative futures this morning. This resilience is welcome, and follows an out of character strength our market has possessed over the past month in spite of a flat to bearish U.S market. Considering U.S futures aren’t heavily selling off, our market may be interpreting this as a sign of stability at this stage and therefore no reason to panic. One can’t help but feel though that this may be short lived. If U.S futures show signs of a continued run down following the Fed news, then our market will likely tip and start pricing in the previous and expected falls.
The next support, which we could expect to hold if the falls lack conviction, is the previous top of the consolidation range at roughly 7325. Beyond that, we have roughly 7250 and 7200 as the next key targets. Finally, if we see an excessive move down, we would expect 7100 to hold which is also where roughly the long-term uptrend line comes in.
Overnight US shares pulled back after the US Federal Reserve announced they would soon start winding back the monetary stimulus they had been providing in response to COVID-19. They indicated that they expected two interest rate rises before the end of 2023, with a tapering of quantitative easing expected to start in the coming months. In other economic news, building permits and housing starts were lower than expected, while an oil inventory read showed a bigger than expected drawdown in US oil inventories than expected; though this wasn’t enough to force oil prices higher. Consumer Discretionary stocks were the only stocks to close (slightly) higher on average overnight, while every other major sector on the S&P 500 closed lower, with Utilities, Consumer Staples, and Materials faring the worst.
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