Tomorrow is a big day for disseminating information with market-moving potential. The market is bored with war, pestilence and famine so it must be FED pronouncements and GDP data that can provide a volatility boost. The markets did twitch today as the European Union and the U.S. both upgraded the sanctions against Putin’s Russia. It will be very difficult for Russian banks and large energy consortiums to raise dollar- and euro-based capital. Even with the advent of new and improved sanctions the global equity markets barely moved, especially as corporate earnings in the U.S. continued its string of “beats.” The counter to the continued strength of the equity markets is the behavior of the global debt markets as European sovereigns from Spain to Germany have reached record low yields. The U.S. yield curves continue to flatten as investors continue purchasing 10- and 30-year debt driving long-term yields lower. Again, I will state that while the curves are flattening the 2/10 U.S. curve is not historically flat.
***FOMC at 1:00 p.m. CST: I am not expecting any change to the FED statement in terms of forward guidance or any other nuance unless the GDP release tomorrow morning is much greater than the expected 3.1%. In such times of geopolitical turmoil the FED will be ultra cautious in not rocking the financial boat, so no surprises. What will bear watching is the vote. Will it be unanimous again, or will the mouths that roar–Plosser, Kocherlakota and Fisher–actually put a decent vote to the hawkish speeches they make in the post-FOMC meeting time period. Dallas President Richard Fisher had a scathing Wall Street Journal op-ed about current Fed policy but last time he voted with the group. If it was a 9-3 vote (and I think all are eligible), it would cause yields to rise and all asset groups to sell off. A GROUP of negative votes in contravention to Chair Yellen would be a big story. However, the statement itself will be benign as Janet will again do all she can to keep the financial world on course. Gort, Klaatu barada nikto–no world destruction from the Fed Chief.
***A key technical to watch–and one that I warned of after the Swedish Central Bank (Riksbank) dramatically cut the lending rate on July 3–is the EURO/STOCKIE [EUR/STOK]. It seemed to me that the Swedes cut rates to weaken the KRONER against the EURO and for two weeks it worked. Yesterday, the EURO/STOCKIE revisited the lows made on the day of the dramatic cut in rates. In Monday’s trading session EUR/STOK traded through the July 3 low of 9.1540 but closed back above 9.1850, providing a good test of that support level. The low for the day was 9.1464! If the euro begins to hold below 9.15 on a closing basis it would mean that it’s weakening as it can’t hold its strength against a currency intervention by the Swedish central bank.
The euro has been holding the 1.34 area against the U.S. dollar but the recent efforts by the European Union and the U.S. to increase the sanctions on Putin’s Russia may finally be unnerving some investors. Also, as the YIELDS ON SOVEREIGN PERIPHERAL DEBT compress, buyers of debt may be looking in other arenas for increased yield which seems to have put downward pressure on the EURO. Remember, monetary flows in search of higher government yields have been a support to the EURO (contrary to the wishes of Spain, Italy and France). But the Swedes would like a weaker currency relative to the euro so it’s something to watch.
***Second quarter U.S. GDP will be released at 7:30 a.m. CST. After -2.9% print in the first quarter the market is looking for 3.1% to offset the lost growth. This is always a difficult number to weigh as it will be revised three times. It seems that it will take a number above 4% to shock a very complacent market. If the number were to surprise on the high side look for the dollar to rally, equities to break and then rally, bonds to fall and the precious metals to also be in sell mode. However, the short-term interest rates have the biggest potential to affect the entire market for if the RED EURODOLLAR CONTRACTS were to sell off the currencies and metals would definitely take their clues from short rate movements. Then it will be waiting for the FED. A strong GDP with an unanimously complacent Fed then may undo all the early morning movement–and all with record-low volatility in play.