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Fed Preview, Nasdaq hits 10k & AUD/USD - DAILY MARKET UPDATE

Chart of the Day: AUD/USD (daily candlesticks)
•    Nasdaq Composite breaks 10,000 for first time
•    Australian dollar (AUD/USD) drops from 11-month high


The ‘risk trade’ that has been prevailing across markets has been taking a breather, perhaps with some trepidation before today’s Fed decision. Stock prices- particularly airlines shares, the Australian dollar, industrial metals and bond yields all turned lower on Tuesday. The exception to the risk off mood was the Nasdaq, which crossed 10,000 for the first time as investors sold off downtrodden shares like airlines and bought back into tech shares like Apple.


“Never, ever argue with your trading system” - Michael Covel 

Fed Meeting Preview

The Federal Reserve will decide interest rates today. The decision and accompanying comments will be especially meaningful after such a strong rally across markets. Long term bond yields are rising in response to better economic data- notably the surprise US jobs gains in May. This is an issue for the Fed, which is trying to keep borrowing costs down to spur an economic recovery.

The Fed might choose to leave long-term rates alone since they are being accompanied by rising investor confidence. The risk to doing that is a spike in yields that unnerves broader markets. If it chooses to address them, the two main options are ‘forward guidance’ or ‘yield curve control’. 

Forward guidance is all about the Fed spelling out to markets what it plans next- there are two methods that could be introduced – Outcome-based and Time-based. Outcome-based means the Fed would commit to specific targets to be reached before tightening policy such as on inflation and unemployment. Time would likely be via the ‘dot plot’ where Fed members forecast where short term interest rates will be over the next few years.

Yield curve control (YCC) is the policy that was first used in Japan, but now in other countries including Australia. It means buying enough government bonds to target a specific interest rate on government bond yields. Introducing yield curve feels like a measure that should be spared for the next market panic, so if any change is to happen today it seems like it should be the forward guidance.

Rich summarised the use of forward guidance in the ‘Week Ahead’ video as follows: “If the Fed guides that policy will remain loose until full employment and its 2% inflation target are met – or if it says rates are expected pinned to the ground for a long time – say until the year 2022 – then those in my view should be positive forces for both gold as a hard asset and riskier assets like stock markets. Otherwise if markets come away unclear about what the Fed is planning next– that could call the end of the gold rally for now.”



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