U.S. stocks posted their best weekly performance last week, sending the S&P 500 above the critical resistance level of 2,815. Equity bulls may see the break of the technical resistance as an indicator of further expected gains, especially given the CBOE’s Volatility Index “VIX” has fallen to its lowest level since October 2018. Two factors have driven equity investors' optimism: hopes of a resolution in ongoing U.S.-China trade discussions and central banks’ pledge to keep supporting waning economies.
Bonds markets, however, seem to disagree. If the outlook is as rosy as equity investors suggest, yields on the longer run of the Treasury Curve should have been climbing. Instead, U.S. 10-year yields have fallen below 2.6% for the first time since early January, suggesting that growth and inflation expectations will remain weak for the foreseeable future.
Another concern for the 3-month bull market is liquidity. The recent rally has not been supported by strong inflows, indicating that fewer investors are participating in this bull market. It remains to be seen whether equity or bond markets are right; however, it doesn’t seem this is the most loved bull market.
Will the Fed’s patience reflect in the dot plot?
The Federal Reserve’s monetary policy meeting is likely to be the most significant risk event for the week.
While it is not expected to see changes in interest rates, investors are hoping for an announcement to end the central bank’s balance sheet reduction. Such a move could prolong the recovery in equity markets.
According to Fed Fund Futures, markets do not just expect a zero chance of rising interest rates on Wednesday, but are indicating a 26% chance of a rate cut by year-end. It will be interesting to see if the Fed agrees with current market views. If the dots on the dot plot are going to be dragged lower, this could attract new selling opportunities for the USD, but Powell’s tone and his assessment of the U.S. economy will also drive the currency.
Deal or no Deal?
The Bank of England is also meeting this week but this session is likely to be a non-event, with the central bank not expected to make any changes to policy. In fact, it’s the E.U. summit on March 21 – 22 that traders will need to keep an eye on. Will E.U. leaders agree on extending the Brexit deadline, or will they provide some further compromise before the March 29 deadline? If no agreement is reached at this summit, the U.K. will be left with one option. A no-deal Brexit!