What has happened
Markets had a quieter day yesterday with risk assets lacking direction ahead of today’s conclusion of the Fed’s FOMC meeting. Interestingly, despite today’s upcoming unveiling of Fed policy, volatility expectations have hit post pandemic lows in the United States.
Will the cavalry arrive?
Today’s post-FOMC package includes not only the policy announcement but a press conference and updated economic projections. On the economic projections they are very likely to be upgraded from the last assessment in December, principally because the $1.9 trillion fiscal package has been successfully passed. What these sunnier economic predictions do to policy, current and future, is however up for debate. The ‘dot plot’ which shows interest rate estimations for each Fed member over the next few years will be updated, and markets will be looking at whether a hike is included in the ‘end of 2023’ dot. Should the economic and inflation forecasts be upgraded but the dot plot remains unmoved the bond market may conclude that the Fed is behind the curve and this would impact Fed credibility. In terms of near-term policy, we expect the Fed to continue with their narrative that inflation will be transitory, pointing to the output gap in particular. Markets will be hoping for a nod towards the action the Fed will take if bond yields continue to rise and without a commitment to some action, market volatility may return.
Technology rises
US Equities hit all-time highs on Monday and with this recent rally in risk appetite, technology has also risen. Earlier in the year there was a negative correlation between bond yields and technology shares (when yields went up, technology share prices went down) however technology has recently risen despite rising yields. One possible explanation for this is that markets are preparing for the stimulus cheques in the US which are expected to be partially invested into retail favourite technology names. This disconnect feels unsustainable as stimulus cheques are very likely to be off the Congress table now until at least next year, this could lead to some technology weakness over the coming weeks.
What does Expat Wealth Adviser think?
It is difficult to interpret how much of the recent market calm is pricing in some Fed action and how much is investors realising that, for all the headlines, US 10 year yields are only now back to their 2019 lows. At the start of the year we highlighted policy risk as our main concern for 2021 and Fed policy is one of the most important, it could be entirely uneventful but there are plenty of tail risks to tonight’s announcements.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | 0.1% | 2.3% | -0.8% | 3.5% | |
| MSCI UK All Cap GBP | 1.1% | 1.2% | 1.7% | 6.6% | |
| MSCI USA GBP | -0.2% | 2.4% | 0.2% | 3.7% | |
| MSCI EMU GBP | 0.3% | 1.7% | 0.8% | 3.1% | |
| MSCI AC Asia ex Japan GBP | 0.6% | 1.8% | -6.9% | 3.6% | |
| MSCI Japan GBP | 0.7% | 3.0% | -3.0% | 2.0% | |
| MSCI Emerging Markets GBP | 0.7% | 2.4% | -6.2% | 3.0% | |
| MSCI AC World IT GBP | 0.7% | 3.1% | -4.5% | 1.1% | |
| MSCI AC World Healthcare GBP | 0.5% | 2.3% | -3.0% | -1.6% | |
| Barclays Sterling Gilts GBP | 0.1% | -0.9% | -1.4% | -6.8% | |
| Barclays Sterling Corps GBP | 0.0% | -0.6% | -1.5% | -4.3% | |
| WTI Oil GBP | -0.9% | 1.2% | 8.1% | 31.2% | |
| Dollar per Sterling | -0.1% | 0.0% | -0.1% | 1.6% | |
| Euro per Sterling | 0.2% | 0.0% | 1.6% | 4.3% | |
| MSCI PIMFA Income | 0.3% | 1.0% | 0.1% | 1.8% | |
| MSCI PIMFA Balanced | 0.3% | 1.2% | 0.1% | 2.3% | |
| MSCI PIMFA Growth | 0.3% | 1.6% | 0.1% | 3.3% | |
Source: Bloomberg as at 17/03/2021. TR denotes Net Total Return
