Stocks Dip And Surprise Index Falls As Fomc Meets

Stocks Dip And Surprise Index Falls As Fomc Meets

Stock futures, which closed up 1.2 to 1.4%, signaled the lower open this morning ahead of the two-day FOMC meeting in which the Fed is expected to leave interest rates unchanged but change its tone on future rate hikes.  



Stocks Dip And Surprise Index Falls As Fomc Meets
Stocks Dip And Surprise Index Falls As Fomc Meets

European shares, with the exception of the FTSE 100, are down after German investor confidence rose less than forecast. The euro strengthened as the dollar pulled back from its highs. Some analysts in Europe speculate that weaker U.S. economic data is further reason why the Federal Reserve won’t increase interest rates in June.

Meanwhile oil fell for a sixth day and scored a fresh low in early Tuesday trading. OPEC predicts that US production will drop by 2015, but US producers report that while the US rig count has dropped, only the most unproductive rigs have been closed and output is unlikely to come down.

The 10-point drop overnight in the S&P futures reflects the larger retreat of US stocks after a big up day Monday. In a classic case of the phenomenon floor traders call "Mutual Fund Monday," institutions were buying and index arbitrage buy programs, which make up a large portion of overall trading volume, were running buy stops all morning.

It was a short squeeze, plain and simple, hitting all the protective buy stops set by short sellers in the stock futures and driving the index futures up. When that happens, automated buying of actual stocks gets triggered as well and the futures and stocks reinforce each other.

Meanwhile, the Shanghai index continues to perform strongly. Chinese shares rose to the highest since 2008 and the yuan jumped the most in a month in offshore trading.

THE FED COULD INCREASE MARKET VOLATILITY: LAGARDE

A couple of news items offer perspective on the Fed's two-day meeting and its possible effects on market volatility. IMF head Christine Lagarde said in Mumbai on Tuesday, “Even if [the rate increase process] is well managed, the likely volatility in financial markets could give rise to potential stability risks," especially for emerging markets like India.

India suffered a huge outflow of investor dollars in 2013 due to the Fed's announcement that it would taper its QE. Since then, new Reserve Bank of India chief (and U. of Chicago professor) Raghuram Rajan has raised India's foreign exchange reserves to a record $338 billion.

SURPRISE! THERE ARE FEW SURPRISES

One of the more whimsically named economic indicators, the Bloomberg ECO US Surprise Index, which measures whether data beat or missed forecasts, dropped to its lowest level since 2009 after measurements of producer prices, factory output and consumer sentiment all unexpectedly fell.

How did all those unexpected drops lead to a drop in a Surprise Index? The index measures the capacity of the economy to outperform expectations. In other words, it measures the likelihood of pleasant surprises in the economy, and apparently we are unlikely to be pleasantly surprised right now.

This may increase the chance that the Fed will avoid dumping another unpleasant surprise on us. However, it won't affect the markets' ability to react with volatility and fear of what might happen. Volatility is likely to increase no matter what the Fed does.

Volatility is good news, however, for traders who know how to embrace it. That includes traders of binary options, which are designed to turn volatility to a trader's advantage.


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