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Markets freeze ahead of FOMC

European markets continue to lack any palpable direction as the 'recovery' seen in the past three weeks appears to have hit the buffers.

Fed building
Source: Bloomberg
  • Indices hit the buffers as volatility wanes and direction disappears
  • Fed rate hike unlikely due to number of moving parts
  • Chinese data not as bad as first glance
  • China policy highlights new erratic mentality

Understandably, as we draw towards Thursday's long anticipated Federal Reserve meeting, the willingness of traders to hold a position throughout the whole week is going to be lower.

I see a rate hike on Thursday as unlikely given sheer size of moving parts including a mid-selloff stock market, a waning Chinese economy and multi-year lows in oil with an associated impact upon inflation, jobs and US growth. Nevertheless, with the markets factoring in a 28% chance of some sort of hike, there is certainly enough backing to induce major volatility come Thursday.

The question is whether a decision not to hike will even be enough to lift global indices out of the current negative mindset that has dominated the past five months.

Weekend data out of China continued to disappoint, yet this should have come as no surprise given the lack of signs that this slowdown will let up anytime soon. In fact, the most surprising thing was probably that analysts even estimated relatively positive numbers in the first place.

With Chinese industrial production and retail sales rising, the numbers were relatively positive despite some missing estimates. However, given the sheer amount of measures taken by the Chinese government and PBoC, it is clear that the positive impacts have yet to be felt.

The decision from China to open up state-owned companies to private investors to boost investment amid waning credit liquidity can be taken in two lights. Firstly it shows that the Chinese are using this crisis as motivation to implement measures which will open up the economy and move more towards a standard market-based economy.

However, the short timeframes between each new measure shows that the Chinese are very much in panic mode and given the very well thought out typically long-term strategic nature of the Chinese ruling party, this change in tact will be partly responsible for the feeling of anxiety dominating Chinese markets.

 

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