Cautious Start to the Week as Fed Statement Eyed

It could be a very interesting week for the markets, dominated by the Federal Reserve meeting on Tuesday and Wednesday that could determine how the markets trade over the next couple of months. Corporate earnings will also remain a big focus this week, especially as they could be the last set of results we get before the Fed hikes interest rates.

Needless to say, everything seems to come back to the Fed in one way or another at the moment. Whether it’s the US, emerging markets or commodity prices and commodity-reliant economies, everything seems to hang on whether the Fed raises interest rates this year or holds off and waits for the economy to show more signs of strength.

The Fed is very unlikely to raise interest rates this week and it’s not this that has investors on edge a little. I can’t imagine that the Fed would choose a meeting that doesn’t have a planned press conference afterwards with Chair Janet Yellen, to announce the first rate hike in more than nine years. It’s the statement that accompanies the decision on Wednesday that investors will then obsess over for clues that could really shake things up in the markets.

Any suggestion that the Fed remains on track to raise interest rates in September, the next planned meeting, is likely to stoke quite a reaction in the markets. Investors remain in denial despite the repeated warnings from Yellen that they intend to raise rates this year. The belief that the economy isn’t yet strong enough seems to be clouding people’s judgement on this, preventing them from seeing what is right in front of their eyes. The result of this could be quite a shock for the markets and more trauma for commodity sensitive assets.

*Bloomberg Commodity Index down more than 11% this year. Source – Thomson Reuters Eikon.

This makes earnings increasingly important as the current levels, not far from record highs, can only be justified by ultra-loose monetary policy or strong fundamentals. The absence of both could prompt investors to begin looking elsewhere for value. Already a lot of people consider there to me far more value in Europe and weaker earnings in the US will not help that.

It will be a slightly quieter start to the week today, with not much economic data being released. This morning we’ll get the German Ifo business climate reading, which is expected to rise slightly to 107.6 from 107.4. This will be followed later on by US core durable goods orders, a great indicator of sentiment in the US. While these numbers can be volatile, they offer great insight into consumer and business sentiment as people only make these large investments when confidence in the economic outlook is strong.

The weaker start to the week appears to reflect a more risk averse attitude ahead of the Fed decision and statement on Wednesday, something that could continue over the coming days. These markets can move quite aggressively on these central bank decisions, particularly where the Fed is involved and investors are likely to be quite cautious as a result.

The FTSE is expected to open 18 points lower, the CAC 18 points lower and the DAX 42 points lower.

For a look at all of today’s economic events, check out our economic calendar.

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