Yesterday, it seemed that the Federal Reserve fueled speculation it will cut stimulus in coming months by somewhat emphasizing a recently strong economy. Many investors were seemingly positioned for a hyper-dovish statement where the Fed still emphasized they could either add or subtract stimulus, but the Fed did not do that. They emphasized the taper should occur, but will wait to make that move. Economists at Citigroup Inc. and Barclays Plc said yesterday’s Fed policy statement opens the possibility of reduced bond purchases as soon as December.
Equities: The DEC13 E-mini S&P 500 (CME:ESZ13) is down 6.25 points to 1754.25. If this market can hold below 1750, we look for at least 1737 to be approached, and possibly head lower from there. This area in the low 1750s is a key area for this market. Yesterday’s Fed announcement took a bit of tailwinds away from the equity markets, as the Fed emphasized a stronger economy, and basically told the market it still has tapering plans. We believe we might see further downward pressure in the SP500.
Bonds: The bond market is also experiencing downward pressure, with the DEC13 U.S.30-year bonds (CBOT:ZBZ13) trading lower by 14 ticks to 134’17. The bonds are down because the Fed did not mention at all the likelihood of adding more stimulus, and actually was more hawkish than markets were expecting. There is a chance, dependent on the incoming data, that the Fed will taper in December. If the market starts to price in this possibility with higher probability, we could see the bond market head lower from here, and possibly even approach 2013 lows at the 128 handle.
Currencies: The U.S. Dollar Index (NYBOT:DXZ13) is strong today, with the DEC13 USD up 37 ticks to 80.22, after a more hawkish than anticipated Fed statement. These next couple months will be pivotal for the USD, and especially starting with next Friday’s jobs report. If we see a larger than expected jobs number, we look for the USD to continue today’s rally and head to at least 80.75. The DEC13 Euro has quickly reversed course after breaching the 1.38 level. The Euro is down 112 ticks to 136.16. Interestingly, the DEC13 Pound, Aussie, and Kiwi are all higher today. The DEC13 Kiwi bounced off of a very key 82 level, and is now up 47 ticks to 82.48.
Commodities: DEC13 gold (COMEX:GCZ13) is down $24 to $1,325. Taper-talk seems to be the enemy of the gold bulls, and this idea proves correct again today. We believe gold will react inversely to U.S. economic strength, so if we start to get really good economic data which could prompt further taper-talk, we believe gold could fall further and head into the $1,200s again. The energy complex is lower today, with DEC13 WTI crude (NYMEX:CLX13) down $.34 to $96.43. We believe crude is in a downtrend and may head to $92. DEC13 coffee (NYBOT:KCZ13) can’t seem to find any sustained buying, even after a long and steady recent drop.