The past 2 FOMC meetings marked intermediate term tops, April 29, and June 10. This time, I expect it to mark a short term bottom. The expectations of the Fed are sky high, and that leaves a lot of room for disappointment for tomorrow. The Fed says they don't pay attention to the dollar but their policies sure do seem to follow it closely. If you remember, when the dollar was strengthening in early 2015, Yellen was expected to signal a rate hike at one of the spring meetings and instead, she kicked the can on rate hike signaling and the stronger dollar/weaker oil prices was the main reason for it.
This time, you have the opposite situation, where expectations are for the Fed to remain super dovish and to continue to aggressively buy bonds. And the most important thing right now for the Fed is that the dollar is weakening, commodity prices are going higher, but bond yields are also going lower. That gives him room to fight against market expectations to try to slow the dollar depreciation. These central bankers are control freaks and usually don't want any sharp movements one way or the other in the currency.
Powell will not come out as dovish as he did last time, and that will disappoint the market. Of course, he won't be hawkish, but being less blunt about using his "tools" and not signaling any new asset purchase policies/ yield curve control in the near future would be enough to show the market that he is taking his foot off the accelerator. And that's all that needed for the market to selloff.
If my prediction ends up playing out, expect a big pullback in gold, silver, and oil. A rally in the dollar and a bump higher in 10 year yields. The stock market will not like it, and will selloff on FOMC day. Gold and silver are egregiously overbought and the sentiment is getting bubbly, and a sharp pullback is imminent. A less dovish FOMC meeting would be a dagger into the heart of the newly minted gold bulls who have been buying all time highs.
If gold can get back close to the highs in the overnight session, it would be worth putting on a swing short position, with a combination of technical overbought conditions with Powell likely not placating the market as much as everyone expects.
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4 comments:
Due to being conflicted with democratic party, effect of the stimulus is likely to be decreased.
I think it's good timing to add short a bit earlier prior to FOMC or right after FOMC.
Additionally, impact of the earning announcement of major corporations will be gone I guess.
Thx for your analysis always.
Apologies for being dumb here. You say you expect this meeting to mark a short term bottom but then spell out a scenario where there is lots of room for disappointment, resulting in $ rally, commodity & bonds sell off, and a stock market sell off. That in itself would imply the FOMC marking (again) a short term top, no?
No, I wasn’t clear in my writing. I expect a short term dip in stocks and bounce back higher after tech earnings on Thursday come out. On the other hand, I expect a bigger and longer lasting dip in precious metals and a longer lasting bounce in the dollar that should last for several days to a few weeks.
Ok, Powell stayed with the script, staying dovish, didn't really say anything new. Still waiting to add to my Nasdaq short position.
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