Swissquote: Equities hit record as Fed meets

Swissquote: Equities hit record as Fed meets

2 november 2021

Aandelen Fed
Federal Reserve (2).png

By Ipek Ozkardeskaya, Senior Analyst, Swissquote 

Nothing gets in the way of the equity bulls: not chip shortages, nor labour shortages, or the energy crisis, or the pandemic, not even the fact that the Federal Reserve (Fed) is just about to announce scaling back its massive bond purchases program in order to contain the rising inflation.

The bulls continue pushing the equity rally to fresh records. The S&P500 and Nasdaq both renewed record on Monday’s session, whereas the major headline on Bloomberg this morning was that ‘the supply chain crisis risks taking the global economy down with it’.  

Still, investors prefer seeing the glass half full: we have a strong earnings season, 80% of the S&P500 companies that announced earnings so far, beat expectations.  

Also, people are craving for positive news and wild moves. If there are none, they make them up.  

The latest GameStop rally was backed by no good news at all. The company COO, which was welcomed with fireworks and a lot of enthusiasm seven months ago just left the company abruptly.  Normally, it’s no good sign. But traders preferred hitting the buy button on the CEO Ryan Cohen’s ‘MGGA’ tweet, which was interpreted as Make GameStop Great Again. A single tweet triggered a 9% rally on Monday, a tweet that came following a suspicious departure from an important figure in the company. But this is what people want: wild moves. 

Fed meets 

The Fed starts its two-day meeting. The US policymakers see that there is an ongoing and aggravating issue with the rising inflation, they also see that it is not as transitory as they first thought. And they also know that the longer it sticks, the less transitory it will be. Action is needed. 

In this respect, there is no doubt that the Fed will announce its plans to start tapering the bond purchases from tomorrow. That’s a well digested and a broadly priced in decision. It is not even a decision, it will simply be a confirmation. 

We know that the tapering will happen gradually, but guess that tapering alone would not help easing inflationary pressures, as buying less bonds still means continue buying bonds: it is not a tighter monetary policy, it is simply a less expansive monetary policy, that should, in theory continue backing a higher inflation 

So, the market is pricing in two 25-bp rate hikes before the end of 2022, versus no rate hike at all that the Fed has promised until 2023. And that first rate hike could come as soon as June next year – this is what the activity on fed funds futures tell us.  

We have been seeing an exponential rise in the US short-term yields since a month, but zooming out, the US 2-year yield for example is still very, very much low compared to the historical levels. The yield which is a touch below the 0.50% right now was flirting with the 3% mark three years ago, before the pandemic hit the fan. Therefore, there is a lot left to be priced in the bond markets. This is why the Fed meeting could still shake the markets, because even though we know the concrete outcome of the meeting, which is the opening bell of the QE tapering, the risks remain tilted to the hawkish side, and that should continue giving some more support to the US dollar index into the decision.

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