Markets wait on Fed action, inventories secondary

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Christopher Morley

The view that the Federal Reserve will announce some sort of a stimulus program at the end of the FOMC meeting today did more for the markets than the outcome of the Greek equity markets rallied while most commodity markets held steady. The outcome of the FOMC meeting will be announced at 12:30 PM EST with a press conference with Chairman Bernanke at 2:15 PM. The market has been pricing in some form of a new stimulus program whether it be an extension of “Operation Twist” or a full blown QE3 program. I am still expecting either a wait and see (for more data points) strategy or a temporary extension of Operation Twist rather than a brand new QE something program. If my projection is the outcome I would expect the market to be disappointed and likely result in selling hitting most of the risk asset least as an immediate reaction. The Fed is going to have to announce a brand new QE program for risk asset markets to rally above current levels. An extension of Twist is not likely to result in much of an additional rally.

Irrespective of the outcome the reason the market is putting so much emphasis on the outcome of one Fed FOMC meeting is because the US economy is going nowhere quick. The underlying problem is a slowing US economy which is slowing from a low growth rate to start with and as such if the slowing continues it certainly exposes the US to a drift back into a recession. This coupled with the financial mess in Europe...which is almost certain to head back into recession at some point in time this year...along with a slowing of the main economic growth engine of the world ...China... does not bode well for any of these economies to jump start on their own. Whether or not the Fed acts today Central Bankers around the world have either already committed to some form of easing...China lowering interest rates, UK more QE while others are likely to join the money printing business sometime in the foreseeable future.

Although none of these actions will fix the underlying problems they will certainly minimize the downside risk in most risk asset markets in the medium term. These actions will also buy time for the global economy to try to turn itself around...especially in a major election year for the US. I hope that no new stimulus is added to the US economy as it just kicks the debt can down the road and exposes the economy to a round of inflation which I believe is worse than a slow growing economy. We will know more in a few hours and the outcome will be the main market mover today.

As I projected the Iran and P5+1 round of meetings in Moscow ended with no progress. The comments indicated that the meetings were intense and pointed but both sides still seem to be far apart. There is a technical meeting scheduled for July 3rd in Istanbul with a negotiating meeting not yet scheduled. I expect the meetings to continue as I do not think the US or Europe have the desire to get involved militarily at this point in time as both the US and EU economies are faltering with many problems yet to solve. A military event will result in a surge in oil prices and a big distraction to solving he economic problems at home. As such negotiations will continue while the sanctions slowly continue to impact Iran. The EU crude oil purchase embargo seems likely to go forward as of July 1st which should result in a reduction of Iranian exports of upwards of a 1 million bpd (as per the IEA in their last Oil Market report). With the global economy just inching along and the Saudi's producing at a high level I do not anticipate any supply issues in the medium term.

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