It’s all quiet, heading into the all-important Fed meeting. For weeks, traders were expecting a 0.25% rate cut… but things changed yesterday.
Source: Bloomberg
We saw the Federal Reserve inject billions in cash to keep short-term interest rates in check… as they were pushing up the Fed’s benchmark rate.
The Fed noted it’s willing to spend an additional $75B today.
With this massive spike in the short-term lending market, it was a sign the Fed may be losing its tight grasp on monetary policy.
That said… there’s a lot of uncertainty around what the Fed is going to do… and how the funding shortages in the repurchase agreements (repos) market can affect the overall market…
… traders are now pricing in a 51.9% chance of a rate cut… when it was sitting at 92.3% just last week.
Source: CME Group
It makes sense that this has pretty much gotten down to a coin flip. Looking at the Fed, I see two possible outcomes right now.
Contents
Possible Outcome for the Fed
First, if they cut rates by 0.25% and signal there may be more rate cuts in the cards… with a dovish tone… those actions could send the markets higher in the short-term.
On the other side, anything else will probably cause some panic and cause traders to sell. Basically, if the Fed looks to leave rates unchanged… it could tank the market.
Of course, the market could see a spike higher initially. However, I expect that most traders will look to fade the move.
What I mean by that, is I think they’ll be looking to buy some puts — in an attempt to hedge their portfolio.
I mean why wouldn’t they?
With volatility being priced as low as it is… and the recent plummet in the $VIX… it would be pretty reckless for anyone who’s long the market at these levels not to buy a bit of protection.
Consequently, we could see a quick spike in volatility.
Some names I’ll be keeping my eyes on today (in terms of potential volatility trades) include VXX, UVXY, and SVXY.
Market at a “make or break” level
As we all know, it doesn’t make a lot of sense to place a sizable bet ahead of the Fed… and everyone seems to believe this will be “THE” announcement that makes or breaks the market.
However, the fact is… no trader really knows how the market is going to react to Jerome’s comments… and that’s probably why the market seems directionless at the moment.
We saw the SPDR S&P 500 ETF (SPY) have a massive rally… and just stall after the market hit all-time highs. It’s almost as if it can’t make up its mind and just break out.
Depending on what the Fed says… we could see the market back at all-time highs (the blue horizontal line)… and I’ll keep a close eye on what it does there… whether it continues higher…
…or if my money pattern comes up signaling a potential crash, I’ll be ready to pounce.
Kooky Action in the Bond Market
We’ve seen treasury yields get a little wild recently…
Just take a look at all this back and forth action in TLT…
However, it looks like the money pattern is flashing a buy in TLT right now (the blue line looks to cross above the red line)… so I’ll be monitoring the Fed very closely.
With treasury yields potentially moving a lot in this Fed announcement, it should affect other asset classes like gold and silver.
That said, GLD — the gold tracking ETF — will also be in play, as well as SLV (the silver tracking ETF).
Remember, it’s Fed day… so don’t get too trigger happy and slam into random trades.
We’re seeing some turmoil in the repo market, which caused a key benchmark (the effective fed funds rate) to jump to 2.25%… and the Fed may address that in today’s press conference.
Of course, there has been a sea of changes in the markets… and the Fed needs to address the ongoing problems as well. Jerome and Gang have their backs to the wall, and it’ll be interesting to see how this pans out.
Source: WeeklyMoneyMultiplier.com | Original Link