Must Know Basics and Trading Ramifications for Fed's November 3rd Announcement

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Includes: AUNZ, DIA, FXA, FXB, FXC, FXE, FXF, FXY, GLD, QQQ, SPY, UDN, UUP
by: Cliff Wachtel
The first big event of the week, and possibly the biggest, is the Nov. 3rd Federal Open Market (FOMC) policy statement because it should clarify the amount and pace of new US stimulus. Hopes that new US stimulus will spur new US and global growth, or at least boost financial markets as all those billions are deployed, have driven markets higher for the past month. There have been conflicting reports about the extent and pace of the new stimulus. Most recently, The Wall Street Journal reported a much smaller and gradual program was coming. However, reports that the Fed was asking Wall Street what kind of stimulus it was expecting feuled hopes that a bigger program could still come.
Key possible scenarios:
  1. Fed announces large ($1+ to 2 trillion) or larger than expected ($2+ to $4 trillion) stimulus, stocks, commodities, risk currencies (AUD, NZD, CAD, EUR) likely to soar higher, USD dives, and may also drive the JPY higher still, much to the chagrin of the BoJ and likely spurs some kind of Japanese attempt at intervention as soon as the initial USD plunge subsides. Global currency and trade tensions (or at least talk of them in the media) heat up. Gold, the prime USD hard asset hedge, heads to new highs.
  2. Fed announces smaller than expected (~500 bln) QE, the opposite happens, varying with the degree of disappointment. Stocks and other risk assets fall, USD strengthens.
  3. Fed defers any decision on QE, stocks and other risk assets plunge, USD soars, risk currencies dive, especially the EUR and JPY, both of which have been primary beneficiaries of USD weakness from stimulus expectations over the past month. The reaction could be moderated if the Fed’s language is interpreted to mean that stimulus is coming but just slightly delayed.
Trading implications
Even if this were the only significant risk event this week, one would have to advise extreme caution about opening new positions. However given the additional potential market moving events this week, including:
  • US Congressional elections: Expected to give the more pro-business/market Republicans control of at least the House if not the Senate. Markets seem to believe this will be positive for growth, though it is as likely a recipe for deadlock unless the Republicans can take control of both houses of Congress.
  • Greek and Portuguese elections: Seen as a barometer of whether these nations can maintain austerity spending cuts as per EU agreements. The main Portuguese parties supposedly already have an agreement to stay the course. The Greek PM has stated that if he gets anything less than a clear victory for his party he’ll call new elections.
  • US monthly jobs reports.
  • First week of the fiscal year for many US mutual funds, could produce profit taking because taxes on gains not due until next year (hat tip to businessinsider.com).
We thus suggest avoiding new positions for all but the most short term and news-based traders.
DISCLOSURE & DISCLAIMER: NO POSITIONS, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER