All eyes are on the Federal Reserve this week, as the long-awaited June meeting nears. Investors have been bruised by the sharp increase in volatility over the past two weeks and it doesn’t look as if things are going to quieten down any time soon. Having got used to the ‘sugar rush’ of QE3, many investors would be disappointed if the Fed decided to end the party too early.
Heading into the close the FTSE 100 has gained 40 points, beginning a key week for markets on a strong note. With little economic or corporate news on the agenda, the FTSE has been driven by a calming of fears that the Fed is about to start signalling a change in policy. Although the indices has borne a 300-point loss since the top in mid-May, there is a strong case for arguing that investor appetite for risk has not gone away entirely. Investors have fallen back on the argument that stimulus and incremental improvement in economic data bode well for equities on a longer-term timeframe, even if the boundless optimism that characterised the first part of the year has given way to greater caution. Banks are in the frame today after further hints that the government is mulling some sort of action regarding its stakes in Lloyds and RBS. As the next election gets closer, such speculation will only increase.
US markets are similarly confident, with the Dow Jones once again enjoying another 100+ point move. A strong headline number from the Empire manufacturing index may have helped, but the index is looking better than its component parts, most of which showed deterioration. Perhaps throwing billions of dollars at the US market in QE form is not having the wondrous effects we had been led to believe it might. It is hard to avoid the feeling that the fate of this rally, which is still looking healthy from a US perspective, will be decided this week. With a press conference thrown in on Wednesday as well, there will be plenty for investors to chew on.
In both its US and Brent forms, oil is looking to nudge out of the trading ranges that dominated in May. In part this is optimism that the Fed won’t look to change tack from its ultra-loose policy stance, with concerns about Syria and the deteriorating situation there also being thrown into the mix.
Sterling continues to cling near its highs for the month, ahead of CPI data released tomorrow from the UK. Expectations are for a modest increase in the pace of price growth, but sterling watchers should be cautious if tomorrow’s data causes any spurt in the currency, since the Bank of England minutes follow swiftly on Wednesday. Tucker’s departure last week suggests new governor Carney could be aiming for a big shakeup in policy, which could make trading in cable a lot more entertaining.