Well, as knee jerk reactions go, that was quite a big one. The FOMC meeting minutes have driven a relief rally on equities and precious metals, whilst pulling a correction in the recent strength of the US dollar.
The FOMC cut its growth outlook citing the high value of the dollar, whilst also noting that global economic weakness was also a concern. The committee also also debated the “considerable time” wording of the statement with the notion that it would be restrictive, adding that data dependence should be emphasised. This was far more of a dovish set of minutes than the market had been expecting following the “dot plot” from the original statement that suggested the committee were getting ready to raise rates steadily when the tightening begins.
Whilst this seemingly pushes back expectations of some in the market that a rate hike may come sooner, the reasons for doing so are hardly positive (i.e. concerns over global weakness). Policy normalisation, when done due to returning economic growth and prosperity should be seen as a good move, however this is increasingly not going to be the case. The Fed will need to see wages growth and inflation moving back towards its 2.0% target, but real GDP growth is projected to flatten off in the next few years and stabilize around 2% to 2.5%.Is this enough to get the market on board with rate hikes?
There were sharp rebounds on Wall Street on the news that the Fed was more dovish than the market had factored in. Good news? Well in the short term, maybe. This is a relief rally as a taper tantrum has been overdone near term. However, look at the reactions in Europe and the move is far more muted. The Fed cutting its growth projections is not too positive. These equity bounces in Europe may not therefore last too long. The reasons to be negative (Russian geopolitics, Ebola, ISIS, slowing German economy etc.) remain in force and will continue to dog European markets. We have already seen the gains on the FTSE 100 drift away through the morning and the market is now basically flat. The S&P 500 index futures have also lost around 3 points in the past half an hour and are now only calling for a 2 point jump at the open.
But what of the correction on the dollar? The move has seen a reaction low on the Dollar Index broken for the first time since the dollar rally started in late June. This opens for a near term correction. In fact there have been corrective patterns seen on Euro/Dollar, Dollar/Yen, Aussie/Dollar and also on Gold. This may well prove to be a near term move, but the bulls are with the run at the moment. There is however the basis of support on the Dollar Index around 84.58 which is only just over 0.5% away from current levels.
Despite this, we can still derive some near term targets that have been implied from the move over the past few days.
One thing to remember though, as I mentioned in my morning report, is that in bear market rallies the rebounds tend to undershoot before the selling pressure resumes. Perhaps something to keep in mind before piling in today.