Talking Points:
• The progressive risk aversion through this past week has leveled out to start the week with key SPX levels holding
• Though monetary policy has taken a back seat as a key fundamental theme, the upcoming FOMC decision will draw attention
• Top event risk ahead includes Chinese retail sales, Eurozone investor sentiment, US PPI and a Trump-Merkel meeting
See how retail traders are positioning in the Dollar-based majors ahead of the FOMC decision using the DailyFX SSI readings on the sentiment page.
There was a building head of momentum behind risk aversion last week with the S&P 500 starting to falter under the steady pressure supplied by riskier assets - like emerging markets to high yield fixed income benchmarks. That drive didn't seem to survive the weekend however. It isn't a surprise that speculative momentum hasn't carried the markets forward with such remarkable event risk scheduled this week. The FOMC rate decision stands prominently at the midpoint of the trading week, and anticipation is set extraordinarily high. There is certainty of a rate hike if Fed Funds futures are to be believed. And, while there may be debate over how much traction subsequent rate hikes will generate for the Greenback; there is enough fear of volatility that traders will not reach aggressively before the event crosses the wires.
With the market in a holding pattern before key event risk, thematic trends will play supplicant to volatility. For universal risk trends, US and global equity indexes eased higher through Wednesday. Emerging market benchmarks jumped but high yield fixed income and commodity indexes did little to support the speculative reach. Top headlines for the day included the CBO's (Congressional Budget Office) assessment of the new US healthcare plan, UK Prime Minister May's greenlight to pursue Brexit by Parliament and Bitcoins extended recovery from Friday's extraordinary volatility this past Friday after the SEC's rejection of a cryptocurrency-backed ETF. As remarkable as these trade relationship measures - a theme which has competed for supremacy over market course with sentiment and monetary policy - happen to be, they can't distract from the stronger forces ahead.
As we count down the hours to the Fed meeting Wednesday, the docket will at least provide more targeted event risk. The Asia session holds a round of Chinese monthly figures. Europe's docket will offer the investor sentiment survey's from the Euro-area while the UK will weigh Brexit plans in the House of Commons. The US session offers up producer inflation (PPI) and business sentiment data, but it is unlikely to offer much in the way of course change this close to the FOMC explosion. Off topic event risk like the US President's meeting with German Chancellor Merkel should be monitored closely as material updates can swing the focus to another course. Short-term and range-oriented opportunities offer better circumstance over sustained trends given current conditions. Be wary of conditions surrounding fundamental gravity this close to a key event horizon like the Fed decision. Probabilities can - and do - distort. We discuss the opening market developments in today's Trading Video.
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