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FOMC Statement Outlook and Likely Best Trade Ideas



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FOMC Statement Outlook

The 3 elements of the Fed statement traders will look at:  the tone of the FOMC statement, changes to the discount rate and any mention of plans to end emergency stimulus programs. However, there are good reasons why the Fed won’t want to appear hawkish. Overall, there are more risks than rewards for raising rate increase expectations, so it’s uncertain how the statement will read.

Reasons for a more hawkish statement include:

A combination of sharply improved jobs and spending data suggesting the recovery is progressing, along with rising producer prices hinting that inflation may become a threat. In the past the Fed argued they couldn’t raise rates while jobs and spending were so weak and there was no sign of inflation that suggested a need for increased rates. Now both recovery and inflation data seem to be reversing.

Reasons for no change in tone, rates, or exit strategy deadlines:

Declines in the Empire state Manufacturing survey and NAHB housing market index

The most recent Non-Manufacturing ISM report (which represents about 70% of the US economy) showed activity slowed in October. Soon after this report and the great jobs data of Dec. 4th, Bernanke said it was too soon to raise recovery expectations

Treasury International Capital flow showed that foreigners upped their holdings of the USD by $14.6B, the biggest jump in 4 months, so USD demand remains.

Conclusion

Most do not believe that the Fed would take so bold a step as to raise rates, however, given the Fed’s commitment to slow stimulus and end asset purchases by Q1 of 2010, there may be some encouraging though vague wording about exiting this and other stimulus programs. In sum, we suspect at best a slightly more pro USD statement, but that might be enough to keep the USD aloft, particularly if the EUR continues its weakness.

BEST TRADES PER DAILY CHARTS AHEAD OF FOMC STATEMENT

S&P 500, in tight range continuing its consolidation around 1100. It's been in a horizontal trading range of 1090-1112 since early Nov. later Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. Dubai again reminds markets of real risk of sovereign debt default from Greece, Spain, and now Austrian banks. However, recent good jobs and spending figures in the US, along with continued China growth, suggests valuations may not be so overdone, upping the chance that the S&P may be able to avoid a major pullback for now. See Trading Opportunities section below. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with the S&P 500, CRUDE, GOLD, EURUSD, NZDUSD, and, & GBPUSD, USDCAD, USDCHF

Trading Opportunities:  S&P 500 consolidating but still well within its up-trending channel, though as yet this remains more of a stabilizing than robust move back upwards. Always use sell stop orders. See recommended trades below

Specific Trades: Unchanged since prior report Thursday. Next move likely on US retail figures at 1:30 GMT. Flight to safety has stopped for now, slight reversal back to risk assets, thus a good time for traders awaiting resumption of long positions in risk assets and higher yielding currencies to consider opening positions. Note however, that sovereign debt remains very much a concern, with Dubai in possible default as of Dec. 14th

S&P 500 & Risk Assets In General: Horizontal range trading between 1080-1112. Down slightly, continuing consolidation around 1100 despite Dubai bailout, improving US jobs, spending, though markets cautious ahead of Fed meeting Per the S&P 500, likely continuing higher for now as we get Dubai bailout and confirmation of improving US recovery. Implication: Despite struggles and concerns ahead, uptrend line clearly intact, suggesting we retain our ambivalent long bias

The overall bullish picture of risk assets as per the S&P 500: The S&P 500 back near 12 mo highs of 1112 after great consumer data Friday, and has also regained the middle of its rising channel, suggesting more upside coming for risk assets if it can hold above 1100. It's been in a horizontal trading range of 1090-1112 since early November. We need to see if it can make a sustained break above 1100, Dubai bailout news, along with good jobs and spending data may do the trick. Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. Dubai again reminds markets of real risk of sovereign debt default from Greece and others. However, recent good jobs and spending figures in the US, along with continued China growth, suggests valuations may not be so overdone, upping the chance that the S&P may be able to avoid a major pullback for now.

 

Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at around the1091 (23.6% Fib retracement +20 day MA + some price support from mid-October + rising trend line) and at 1080 (38.2% Fib retracement + rising channel line + lower Bollinger Band + 50 day MA) or a decisive break over 1100. Given the fear reflected in the S&P, traders should be very cautious opening long positions in ANY risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions. They should also have some short positions planned, complete with initial and confirming indicators, and planned entry/ exit points.

 

S&P 500 Daily Chart as of Dec 1 08:47 GMT (02 Dec 15) AVAFX CHART

GOLD: As of early Wednesday around 1126, virtually unchanged from Tuesday, continuing to struggle around the 50% Fibonacci retracement level for the past week Dropped Friday as USD strength overrode the positive impact of growing risk appetite and inflation risk, suggesting gold still has more anti dollar speculation. Many believe it will find support around $1000, barring a major panic event or positive surprise. Recovering its rising trend line in early Monday trade.

Trade Suggestion: It may be a good time to go long given that it is at very strong support in the near term around $1125, at which level there is support from the lower Bollinger Band, rising trend line, and 50% Fibonacci retracement for the past week, still in strong uptrend, though many believe it could test far lower to $1000 or lower if the USD continues to rally. Could drop to test $1110 or lower if Fed statement is unexpectedly hawkish, or move toward $1140 if surprisingly dovish.

At this point, gold is moving opposite the dollar, so watch the EURUSD and S&P 500 for indications of gold's near term moves. Also watch the S&P 500 and other major stock indexes to see if risk appetite gets a lift from the Dubai bailout. If so, that suggests upward movement for gold.

 

Gold Daily Chart (03 Dec 15) AVAFX CHART

Gold's meteoric rise meant it had no time to build up any nearby support levels, which made it ripe for shorting should anything interfere with the forces pushing it up. Friday's NFP did that by suggesting a bottoming in the USD, and gold was very much an anti-USD play that many believed could be overbought in the near term despite its long term bullish potential. Predictably, the fall was hard and fast, allowing only alert traders to catch it thus far. 1150 (also the 38.2% Fibonacci retracement level) has proven to be some support 3 times in the past 2 weeks. Gold is stabilizing as of this writing around $1125. No real support besides the above Fibonacci retracements, (which thus far tend to provide at least some temporary pause in down moves) until about 1080, where both a Fib and upward trend line converge, though we suspect the $1000 level (also has a 61.8% Fib retracement level) should provide some support.

Gold is likely to move this week opposite the USD. If the USD moves higher, gold could test the above support levels, though we repeat the below argument that gold's rally has long term legs. The trick will be to identify the next good entry point.

The Long Term Bullish Gold Argument: Makes sense as long as the USD Doesn't Make a Sustained Move Higher.

As noted in our Global Markets Outlook 11/23-11/27, the belief that there are large buyers like central banks seeking to buy gold may have caused a new fundamental upward shift in price based on this perceived demand. While gold was not immune from the Dubai induced panic late last week, it has recovered those losses already, and is close to recovering its steep upward trend line. This relative strength suggest that if markets truly calm down, gold could resume its climb, even if global equity markets remain pressured by the weight of the extended rally, valuation concerns, and year-end  tax selling.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long.

Consider:

•           In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.

•           Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. The long-term uptrend is not likely to end soon.

•           Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher. As long as the central bank/sovereign wealth/momentum story holds up, Rogers looks correct.

Crude Oil:  Stabilizing around $70, climbing slowly for the past 3 sessions. Since August this has been strong support, though we have less confidence in it given the renewed USD strength. Wait to take new long positions until the USD rally slows and /or we get firming demand figures. Like most assets, could make a move down if the Fed statement is surprisingly hawkish, or up if the opposite.

NB: Crude has been among the weaker risk assets over the past month despite the USD's weakness. A crude peaked week before stocks did, and has been behaving relatively weaker than stocks. For example, yesterday's action showed that stocks were still able to retain some of their gains when momentum reversed, but crude could not, and closed lower. Not surprising, since crude tends to exaggerate the S&P 500's trends for better and for worse. Range bound for the near term, will likely follow stocks higher to its upper range near $82 if stocks can rally, but poor fundamentals and an extended rally for both oil and the S&P 500 that it tracks suggest more downside risk at this time. USD strength has clearly exacerbated this trend, as has the stalling out of the S&P 500 and other risk assets at current resistance levels.

Certainly seems unwise to consider new longs until oil stabilizes, likely around the $73-$60 range, if not lower. An additional outcome of the Dubai crisis may be increased production as the UAE may need to produce more oil in order if it decides to fund a bailout or related assistance to stabilize the Dubai situation.  Watch the S&P 500 to lead oil.

Watch the EUR/USD chart for USD movements, and the S&P 500 chart for overall risk sentiment.

 

WTI Crude Oil Daily Chart (01 Dec 16) AVAFX CHART

EURUSD: Attempting to stabilize in early Europe trade Wednesday around 1.4552. Its fate Wednesday likely to be with market reaction to the Fed Statement. As the prime counterpart of the USD, is crashing through support levels as recent EZ debt downgrades now Austrian banks as of Tuesday,  add to sovereign debt worries and weaken the EUR, while USD fundamentals are steadily improving with great jobs reports, and now blow away spending data this past Friday. Dubai bailout news early Monday should ease debt fears, support risk appetite, and thus possibly cool the USD rally to the EUR's benefit . As of early Monday the 76.4% Fib retracement level is still holding, though it buckled Friday, Dubai appears to be helping risk appetite in general.  Watch the S&P for overall risk appetite, and the EURUSD for a quick gauge of the USD to judge if oil is ready to stabilize.

 

EURUSD DAILY CHART (04 Dec 15) AVAFX CHART

SEE THE LATEST WEEKLY OUTLOOK FOR FULL ANALYSIS OF THE EUR AND USD, AND WHY WE SEE MORE EURUSD DOWNSIDE AS THE MORE LIKELY POSSIBILITY.

NZDUSD: As suggested recently, strong support around 0.7100, made a good entry point for those playing the long side, with the halt in the USD rally. Retreating back into its declining channel, as Austrian bank woes and concerns about a more hawkish Fed Statement today pressure the EUR and bolster the USD. Muted rate increase expectations for the AUD may also be pressuring the NZD Tuesday and early Wednesday, as the NZD tends to rise or fall with the economically stronger AUD.

Trade suggestions: The NZD is struggling at the 0.4265 (23.6% Fib retracement) as the above news has pressured. With the declining trend channel reasserting itself, this pair would make a good short as a USD long play should the Fed statement fuel the USD rally.

Watch the S&P 500 and EURUSD to gauge risk appetite and USD strength. Much will depend on how markets react to the Fed statement Wednesday

 

NZDUSD Daily Chart (02 Dec 16)

USDCAD

Unchanged from yesterday, still within the triangle as the CAD pulls back against USD strength in early European trade Wednesday. Upper line of the declining channel resistance holding as part of the USD rally and drop in oil and stocks, despite good economic news from Canada. EUR troubles and caution ahead of the Fed meeting Wed. also helping the USD

Trading Idea: Friday's great consumer spending data confirmed the fundamental recovery starting in the US and boosted the USD, to the continuing detriment of oil prices, which are a key driver of the CAD. Still plenty of room to play the long side if the USD rally continues. Watch the S&P for overall risk appetite (more generally bad for the USD unless the news also supports US job and spending growth and thus interest rate increases) and the EUR/USD for overall dollar strength. AGAIN, WATCH THE FED ANNOUNCEMENT FOR WHETHER IT EMPHASIZES EXIT FROM STIMULUS OR “LOW RATES FOR AN EXTENDED PERIOD.” Regardless of reality, markets will move on the prevailing interpretation of whether the statement is bullish or bearish.

As we've noted before, the CAD is perhaps the most vulnerable of the commodity dollars to a USD rise because it lacks the yield appeal of the NZD and AUD.

 

USDCAD DAILY CHART (image:03 Dec. 16) AVAFX CHART

USD/CHF

Virtually unchanged from the chart below. Moving up with every bit of good USD news or bad EUR news. We are skeptical about getting into trends this strong before a test, but if the Fed statement is taken as hawkish this one has shown it could move, and has plenty of upside until the next resistance at the 1.0650 level with its 76.4% Fib retracement. Another good way to play the USD long or short depending on the Fed statement today.

 

USD/CHF DAILY CHART (image 07 dec 15)

DISCLOSURE NO POSITIONS