Investors seem to be catching their breath ahead of the release of information straight from the US central bank. They may show that the time for normalization of monetary policy has just come. What does this mean for the stock markets and the dollar?
A dozen or so hours before the publication of the Fed's decision, the markets seem to make up for some of the losses after the turmoil related to the Chinese property developer Evergrande, which is to reach an agreement with its creditors and avoid bankruptcy.
DAX and other European indices ahead of Fed
Thus, on Wednesday, after rebounding during the previous session, European equities continued their gains as Hengda, one of Evergrande's business units, reassured investors by announcing that it will make coupon payments on its domestic bonds on Thursday.
The Euro Stoxx 50 index was up 0.6 percent in the morning, as was Frankfurt's DAX, which was up 0.7 percent and above the 15300 point level, while France's CAC 40 seems to have gained 1.0 percent.
China eases market tensions
China's central bank, which has somewhat distanced itself from Evergrande's problems, also seems to be trying to calm the situation so that there is no crisis of confidence in the interbank market. The People's Bank of China injected CNY120 billion into the banking system on September 22, 2021, as part of a reverse repo operation to maintain liquidity. The amount included CNY 60 billion of seven-day reverse repos at an interest rate of 2.2 percent and CNY 60 billion of 14-day reverse repos at an interest rate of 2.35 percent. With CNY 30 billion of reverse repos maturing on the same day, the move resulted in a net liquidity injection of CNY 90 billion into the market.
Expectations ahead of the Fed
The Federal Reserve is expected to keep the fed funds rate at 0-0.25 percent and bond purchases at the current pace of $120 billion per month during the meeting that ends today. However, there is a chance that the U.S. central bank will likely signal a tapering of asset purchases later this year. Federal Reserve Chairman Jerome Powell and other officials have reiterated that the Fed will begin tapering this year, but investors are waiting for more details, especially after recent mixed economic data. The Fed will also release updated growth and inflation forecasts, and the so-called dot plot could ultimately show pressure for an interest rate hike next year. It is worth mentioning at this point that the Fed has reverse repo operations, the amount of which has already exceeded $1.2 trillion. This means that so much money cannot find a place for itself in the money market and goes back to the Fed overnight. Thus, the introduction of tapering does not seem to do much damage to anyone, as there is over USD 1 trillion of excess liquidity to be removed from the market.
Stable dollar exchange rate
H1 chart of CFDs on EUR/USD pair. Source: Conotoxia cTrader platform
The US Dollar against the Euro, meanwhile, seems to be stabilizing in the 1.1700 area, which in turn was a potential support in August. Hence, the Fed's decision and the volatility that may occur tonight may be key to this level on the basis of defending or overcoming it. It seems that the market towards this region should not remain indifferent. The Fed's decision along with macroeconomic projections will be released at 8:00 pm today, and Jerome Powell's press conference will begin at 8:30 pm.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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