According to an old Turkish saying ‘those who eat get fat, those who don’t regret.’
Traders would pick this up as taking a long equity position as investors continue to navigate an environment of low to negative yields on less risky holdings, with all eyes on the Federal Reserve later today.
“It’s the Turkish way of saying FOMO: the fear of missing out a further rally in case the Fed leaves the taper talk on the sidelines for another meeting. And that fear could keep the US stocks on track for a fresh record run,” explained Ipek Ozkardeskaya, senior analyst at Swissquote, this morning.
The Fed is broadly expected to maintain its ultra-supportive policy unchanged at today’s meeting and will continue adding $120bn worth of bonds to its balance sheet every month despite overshooting inflation.
The major highlight will be a hint of tapering, or the lack thereof. The taper talk itself will probably not happen today. What could happen is a talk on when to start talking about tapering.
“But we know that an increased number of Fed officials will probably be in favour to have that taper talk sooner rather than later, and that’s the major downside risk in the market at today’s announcement,” Ozkardeskaya said.
Nevertheless, any green light for the coming months would be perceived as a hawkish shift in Fed’s policy stance, could weigh on the risk sentiment and may therefore send major US indices lower from their record highs.
It is the main reason why most Fed members will be prepared to delay the taper conversation as much as possible, as the taper talk is the last milestone before the rate normalization talk.
“No one knows what would happen to stock prices when the excess liquidity is gone, given that most stock prices went through the roof since last year, with price-to-earnings and price-to-sales valuations hitting levels last seen during the 2000s dot com crisis,” Ozkardeskaya noted.
“So, there is a reason to be worried about the sustainability of the actual stock rally. But on the other hand, investors also know that the Fed can’t let the stock market fall free, rising inflation or not; a bloodbath in equity markets would trigger another financial crisis,” she added.
No ’kneejerk’ reaction
Yesterday, major US indices came off their all-time highs yesterday, with the Nasdaq slipping 0.71 per cent on the back of economic data revealed in the US a day before today’s Fed decision.
US retail sales fell more than expected in May, while producer prices jumped more than anticipated, triggering a minor loss of appetite in risk assets.
“Yet we haven’t seen a major kneejerk reaction to yesterday’s data, as there is still a broad conviction that the Fed will turn a blind eye on the rising inflation, and insist that the overshoot in inflation is transitory, should not affect the Fed’s inflation target of ‘average of 2 per cent’ and hence, should not lead to an earlier-than-expected policy and liquidity tightening,” Ozkardeskaya concluded.