The Fed Can Stop The Stock Market’s Decline
FxPro Financial Services Ltd | Dec 18, 2018 05:34AM ET
Key U.S. indices lost more than 2% on Monday, so the S&P 500 closed at the lowest levels since November. It is also worth noting the sales prevalence in the last few hours of the American session. With rare exceptions, we have not seen such a dynamic period since the previous month. This is primarily is due to a reduction in the retail funds position.
The stocks that dragged the market earlier experienced the greatest pressure. Amazon (NASDAQ:AMZN) lost 4.5% and NASDAQ fell by 15% from peak levels in early October.
Sales increased after drops below important support levels, where stocks were supported on October and November dips. Such anxiety is caused by worries about the Fed's hawkishness, and is also associated with technical factors.
The FOMC previously predicted three rate increases in 2019. Available data from the United States suggest that the general background is strong and confident enough for now. However, many U.S. companies are international, and the global economy is quickly losing its shape.
Three raises could shake the ground of global growth, increasing pressure on stocks. However, the softness of the Fed’s rhetoric — say, a decrease in the number of increases to 1-2 next year and a willingness to further orient on the situation — can provide some fundamental support to the entire market.
At the same time, the Fed is experiencing a verbal attack by the U.S. Administration, which again and again shows discontent with the announced plans for "growth in three stages." There is a high chance that Powell will still succumb to this pressure and will make a decision that will unfold the stocks trend for a short time.
Usually, stock market weakening is accompanied with a dollar growth, but not this time. Now investors are trying to stay away from U.S. assets, due to the uncertainty around the monetary policy.
Softening of the Fed’s tone will be a negative factor for currency, and this time it is reasonable to expect that if markets perceive a shift in rhetoric as a signal to buy beaten stocks, the dollar will be under pressure, and the growth trend that prevailed in the outgoing year will be replaced by a long-term one with possible weakening USD down to the 88 levels and rising EUR/USD at 1.25 area.
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If Powell acts on the fact, guided by the internal data and current world indicators – then the shares will be threatened by the decline extension. The next important support area is on the September 2017th consolidation, with 5% below current levels and at the border of the bear market (-20% off the peak).
The Fed’s rigidity, during the stock market falling, can return the demand for the dollar as a defensive asset, aiming it at the 2017 highs (about 6.5% higher than current levels): for EUR/USD it will be a direct road to 1.05.
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