Dow Jones under pressure after the FOMC meeting

  Marius Paun | London, UK | Senior dealer | Thursday, 17th September 2020

This week started with renewed optimism regarding the release of a vaccine for coronavirus, possibly by year’s end, which supported the US stock markets. Pfizer, in particular, announced they may be in a position to submit their vaccine for approval by the end of October? Moderna and Johnson & Johnson are also in the late-stage trials and encouragingly AstraZeneca has restarted its trial after a brief halt.

Yesterday, we had the last FOMC interest rate meeting before the November US presidential elections. As it was widely expected, the Federal Reserve committee indicated they will maintain interest rates near zero for more than 3 years through 2023 in order to achieve its 2% average inflation. The statement said that because inflation is persistently below the target, the FOMC will aim for inflation rising ‘moderately above 2% for some time so that inflation averages 2% over time’.

Furthermore, the Fed Chairman Jerome Powell reaffirmed the ‘easy monetary policy will be kept unchanged until maximum employment is achieved’. They will continue to purchase $120 billion a month in Treasuries and Mortgage-backed securities. He added that certain sectors of the US economy will struggle even more without further fiscal aid, conveying some urgency on the Republicans-Democrats spat. However, even though the US Congress has failed so far to agree on a fifth COVID stimulus bill, many investors remained confident that ultimately something will be done.

The US stocks were up in early trading and moved even higher following the pledge to keep rates lower for longer and to allow for more inflation in the short term. But the gains did not last long, the Dow closed only marginally up with S&P and Nasdaq lower. It’s true that Dow is the laggard of the three, which is possibly why it is holding a bit better on the way down.

It was a bit of a surprise as investors already knew that interest rates are going to stay low for the foreseeable future. It might have been that placing a 3-year timeline could suggest a weaker recovery? Powell said the rebound is anticipated to be the strongest in the beginning and gradually slow down afterwards.

Interestingly enough, the Fed Chair also offered plenty of details as to why they are so determined to spur inflation at all costs. He explained that people know high inflation is bad but expressed doubts if conversely many understand that low inflation has also a negative effect. Elaborating on the subject he explained ‘there’s an expectation of future inflation that’s built into every interest rate’ to the extent that decreasing inflation will push rates lower and lower.

Eventually, the Fed will have less room to manoeuvre, cutting rates will not be an option anymore and potentially the economy will still be needing support. The coronavirus effects are still not fully understood, it’s something without precedence in recent times (since Fed creation???). When one considers the huge government debt on top, it becomes understandable why inflation at all cost has become the go-to option.

A stronger US dollar did not help stocks which rebounded sharply after slumping in early trading yesterday. Moreover, in Asian trade it posted its biggest daily rise in more than a week. Nevertheless with this new guidance from the Fed and promises of keeping rates low until employment and inflation goals are reached, many investors see the greenback’s strength as rather temporary.

 

As the chart indicates for Dow Jones, reaching the all-time high of 29,585 (12th of February this year) remained elusive. Considering that S&P and Nasdaq have made fresh records on a regular basis a few weeks back before the selloff started, the odds are with the bulls. However, the short-term moving averages (red line) crossed below the long-term MA (blue line) giving us the bearish signal. On the other hand, the short term MA is still pointing upwards. It’s still down for today but recovered a good chunk of the losses.

On the upside, the first resistance level could be seen around 28,000. It already tried to breach that this morning, but the level held, which brought a retracement. A close above it could build momentum and spur renewed buying. Further upside hurdles should test bulls’ strength around 28,800 marks followed by 29,195 the recent high. On the downside 27,540 should act as the first line of support. An even stronger test for the bears is seen around 27,100 marks.