US stocks gave up before an important decision of the Federal reserve
The us markets on Tuesday remained under pressure. S&P500 has updated the lows of the day before October 2017, increasing its losses from the beginning of the month to 10%. As before, the most intense pressure on stocks observed in the second half of the trading session, while the beginning of the day was relatively positive. The kind we see today: futures on S&P500 added 0.8% to the closing levels of Friday, but remain lower than 24 hours ago.
Your course on the decline also continued in the us currency. The dollar index falls 3rd day in a row amid speculation that the fed will raise interest rates, but dramatically soften their forecasts of monetary policy, inflation and GDP. Likely impact on the forecasts will have criticism from trump and his economic Advisor even though the FOMC is an independent body.
It is highly unlikely that Reserve will sharply change course, whereas only three months ago it was reported that the rate hike cycle is far from complete.
Consider possible scenarios and the market reaction to them:
Scenario 1. The fed maintains GDP forecasts slightly lower estimates of future inflation and adjusted for three rate increases in a row (as before). This unlikely scenario can cause a sharp increase in pressure on the stock markets, risking to start a bearish trend and cause increased demand for the dollar, sending it to update the multi-month highs.
Scenario 2. The fed reduces the forecasts and adjusted for 1-2 increase. In our opinion, this is the most likely scenario. Market reaction in this case is due to the subsequent rhetoric at the press conference:
a. or followed by the indication of the pause in political decisions that can cause the breaking of the uptrend on the dollar, and stock markets in this case, will receive strong support;
b. or you will hear hints that such a pause will occur in mid-2019 and risks returning to the scenario with three promotions. It can provide reasonable support to the greenback, while markets will likely experience some pressure.
Scenario 3. The fed raises and configured a maximum of one increase in the next year. Although the debt markets think such a development is most likely, however it is not particularly laid in quotes: so, if implemented, can severely weaken the dollar and encourage the growth of markets.
Scenario 4. The fed will not increase rates. At all. It will be for the markets a big surprise: takiim, which will dramatically change the trend of the dollar, causing a sale and prompting a rise in stock markets.
In conclusion, we note that the Reserve system differs in that it seeks not only minimal to surprise the markets with actions, but also to try to influence expectations. Therefore, the most likely second scenario with the rhetoric of the paragraph b. In support of this development also say relatively strong domestic performance, which include the improvement of the housing market. At the same time, the decline in energy prices has the potential to further kick-starting the economy, although the short-term it looks to put pressure on the markets.