Tuesday, December 15, 2015
The major indexes are on track for a positive open, with the start of the two-day Fed meeting and a rise in oil prices providing a favorable backdrop.
Stocks have been following the lead from oil prices in recent sessions, and the same trend appears in place for today’s session as well. As we have discussed in this space in recent days, a big part of the market angst is centered on fears to negative developments in the high-yield bond market as a result of the depressed oil prices.
There are no specific reasons for why oil prices should be gaining ground after remaining weak for the last so many sessions. Headlines about the lifting of U.S. export ban or China’s efforts to fill up its strategic reserve with cheap oil don’t offer a good enough explanation. This goes on to show in explicable some of the recent market volatility has been.
The Fed meeting will likely discuss the ongoing developments in the high-yield market, but no one expects them to hold back from announcing the first rate increase Wednesday afternoon. Markets have come around to accepting this Fed reality, seeing the lift-off as a vote of confidence in the economic outlook.
Even more importantly, investors have learned to look past the lift-off and appreciate the Fed’s declared plan for being gradual in future rate hikes. The Fed Chairwoman will likely reiterate this monetary policy outlook in the press conference following the FOMC meeting next week, but the concrete evidence of the policy path will emerge from the committee members’ interest rate forecasts. The last ‘dot plot’ showed the committee 25 basis-point hikes at every other meeting in 2016, with the ‘terminal’ level for Fed Funds not reaching 3.5% till 2019.
Market discourse this year was dominated by the timing of a lift-off. With the timing issue moving to the rearview mirror following the rate hike announcement coming Wednesday afternoon, the topic of discussion will shift to the path of future rate policy.
Sheraz Mian
Director of Research
Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.
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