What should we expect from the markets?
In the beginning, it is better to review the FED's decisions and outlook in short sentences.
1- Bond purchases tapering will continue at the same decided pace that has been decided in December and will end in early March.
2- FED interest rate did not change, but expected to have the first-rate hike in March, right after ending the bond purchases plan.
3- After the first rate hike, FED will start to adjust the balance sheet.
4- The labor market is fine, and there's a pool of people who could come back to the labor force but may not happen quickly.
5- FED does not expect supply chain issues to be completely worked out by end of the year but will have progress
6- The 2s to 10s gap is 'well within the range of normal yield curve slope.
7- Economic outlook is not certain and clear, therefore FED decided to go forward step by step and decide separately in every single meeting for the next step.
So here are decisions and outlooks. As I mentioned in the FED preview article two days ago, we had three possible scenarios and one possible surprise. The second scenario, which was the most likely scenario happened, and the surprise was about faster starting the FED balance sheet rebalancing. So no according to the current situation, we can analyze different markets and see what we have to expect from them.
US Dollar.
Current policy is hawkish, however, it is not much tightening that we could have. However, faster reducing the balance sheet was the main reason to see the US dollar index in the higher levels after the announcement and press conference, but it does not mean that it can go much forward. For the mid-term, the US dollar can be around 96-97 or a bit lower and higher, but this is the area where we can see the dollar. The policy is not supporting to ease the US dollar and is not hawkish enough to encourage the carry traders to move much more and faster, they probably will be waiting to see the next week's ECB and BoE meetings. At the same time, the US will be affected by very important data ahead in this week, including the fourth-quarter Gross Domestic Product growth, the Durable Goods Orders figures, weekly Initial Jobless Claims, and Pending Home Sales data. Better than expected data can lift the US dollar and vice-versa.
Stock Markets
For a better understanding of the future movements in the markets, it is enough to see where the leading indices have been closed last night. Dow Jones industrial average closed at 34,168.09, which is just -129.64 lower or-0.38%. S&P500 was better with just -6.52 points lower at 4,349.93, which is only -0.15%. And finally, the NASDAQ composite closed with 2.82 points (0.02%) gain at 13,542.12. In the past two weeks, markets were decreasing mostly influenced by two important news and reports. First of all, as we know with less FED supportive plans, market participants and investors have been pricing too much on Biden’s Build Back Better Plan. Two weeks ago Mr. Biden in one of his press conferences told that talks about his plan have been suspended and still, there is no way out from existing disagreements. So, the market got a bit more disappointing, while other factors, which are the FED member's comments and leading banks outlooks already was created this negative sentiment. And now we have the FED announcement and Fed chair comments. If we remember, leading banks like Goldman Sachs and some of FOMC members repeatedly emphasized about 4 rate hikes and even some of them were talking about a 50bp rate hike in March. So, these data and reports show that market sentiment was ready for much more tightening policies and was pricing on that. Looking at the chart tells us that we already had the reaction, and this meeting also had nothing to surprise us. Therefore, the expected reaction for the second scenario in the previous article is active now, the side movement with a bullish tendency. It is almost the same for S&P 500, NASDAQ, and Dow Jones.
Gold
Gold and Oil have different reactions to the news, as it is expected to be. The fast increasing US dollar rate put the gold under pressure. At the same time, we could see the US10-year bond yields also increased all way higher above 1.85%, and usually, it is a negative signal for the Gold. However, it was the initial and fast reaction. The economic outlook is uncertain as FED is expecting and still inflation will be higher before lowering by year-end. At the same time, we have still two risks there, Covid concerns are still challenging the economic recovery, while Supply Chain Disorders also will take time to be solved. Mr. Powell last night mentioned that "we will eventually get relief on the supply side, but it's taking longer than expected." Probably getting back to the pre-pandemic situation in the supply chain, will not be earlier than 2023. All these data tell us that can still trust the Gold investment as a countable hedging method. On top of economic risks, we have to add geopolitical risks as well. Russian and Ukrainian border is the latest hot topic that increasing the market risk, and reciprocally the Gold demand. So, gold's outlook is still bright.
WTI
The economic outlook is uncertain, however, we know that it is improving. Especially consumer demands, which means more production and travel. Both production and travel sectors mean more need for Energy. Market demand is increasing, but we do still have different concerns in the energy markets. First of all is a lower investment in the Oil industry during the peak of the pandemic, especially when we had lower prices. And now we can see its effects by lower production and supply. On the other hand, as I mentioned above we have increasing geopolitical risk in Russian and Ukrainian borders which directly will affect the Oil and Gas supply. Therefore as long as we have these concerns, WTI will look the prices much higher than 90 US dollars.
Cryptocurrencies
Reading the FOMC statement and listening to the FED chair press conference and Q&A season, told us that cryptocurrencies almost had no place in these conversations. Not simple word was told about the cryptocurrency market. However, it does not mean that this meeting had nothing to do with this market. As an overall market sentiment, they were also affected by news and both Bitcoin and Ethereum closed lower. Caution trading is supposed to affect the crypto market as well in the next days, however, for the next days and weeks, we have to mostly follow the crypto-related news and events to find out the next targets. As we know Biden's administration planning to have an executive order by early February about the crypto market and it is much more important to watch. For more details about the crypto market sentiment, I can refer you to Wednesday's article with the headline "Is that a dead cat bounce?"
