Stocks Drop as Fed Announces More Stimulus Reductions
Spread betting markets were focused on the week’s monetary policy meeting at the US Federal Reserve, waiting to commit to large positions until after the final decision was announced. The main question had nothing to do with interest rates (as is often the case at these meeting). Instead the real question was whether or not the Fed would continue making reductions in its monthly asset purchases. Ultimately, the Fed decided to cut its monthly purchases in Treasuries and mortgage-backed securities by another $10 billion, which brings the monthly total to $65 billion each month.
This creates major negatives for stock markets because it will likely lead to major downside revisions in GDP growth and in corporate earnings. For the most part, these revisions will be longer term in nature, as there is no reason to suggest that the latest Fed decision will have any impact on this earnings season. But with stock markets still trading relatively close to all time highs in many cases, it was not surprising to see investors start to take gains in anticipation of potential losses down the road.
Going forward, the data calendar will be relatively light next week, although we will have a monetary policy meeting from the Bank of England on Thursday, and UK GDP on Friday. This will be important for traders that focus specifically on developments in the FTSE and any hints at reduced stimulus would likely create a reaction that was similar to what was seen in the S&P 500 last week. UK GDP is still moving at a relatively slow page of 0.7%, so we would need to see some improvements there in order to see rallies in the FTSE this week.
The S&P 500 is starting to look as though a short term downtrend is emerging, with a series of three lower highs seen after falling through 1800. This means that the index will remain a sell as long at resistance at 1790 holds intact. Short positions can be taken here, with stop losses above 1800. Support to the downside can be found at 1760.
The FTSE 100 is having some difficulties establishing a rally after the price fell through the psychological 6500 region, and the overall bias remains bearish as long as prices continue to trade below this level. For the moment, the downside target can be found at 6370, and it is unlikely we will see any major bounces until this area is tested.
The DAX another example of stock markets showing a common theme, with the index posting a series of three lower highs after failing at 9500. The bias here is also to the downside, and the initial target can be found at 9170. If we do see an upside break of 9430, it would indicate the declines have finished, creating a sideways bias.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.