Cautious Investors Wait for FOMC Clues
Investors remained risk-averse on Monday, with the Federal Reserve’s FOMC set to begin its monetary policy meeting on Tuesday.
After Friday’s global stock market rout, investors continued to head for the sidelines on Monday. After last week’s report from “The Fed Whisperer” (Jon Hilsenrath of The Wall Street Journal), which indicated that another $10 billion cutback from the Federal Reserve’s monthly bond purchases will result from the January FOMC monetary policy meeting on Tuesday and Wednesday, investors remained cautious.
If the FOMC does decide to trim another $10 billion from its monthly bond purchases on Wednesday, we could see another stock selloff. On the other hand, after what happened to global stock (and currency) markets on Friday, a good deal of commentary has been focused on the issue of whether the FOMC will (temporarily) reverse its initial $10 billion cutback. This would obviously send stocks soaring. There is also the possibility that the Fed will delay its next tapering move. Since a January taper appears to have been price-in to stocks, the Fed might as well “tear off the Band-Aid” at this point because if the FOMC procrastinates, we could go through the entire process again, next time.
The Dow Jones Industrial Average (NYSEARCA:DIA) lost 41 points to finish Friday’s trading session at 15,837 for a 0.26 percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.49 percent to close at 1,781. The Nasdaq 100 (NASDAQ:QQQ) dropped 0.99 percent to finish at 3,509. The Russell 2000 (NYSEARCA:IWM) sank 1.43 percent to end the day at 1,127.
In other major markets, oil (NYSEARCA:USO) fell 1.01 percent to close at $34.23. On London’s ICE Futures Europe Exchange, March futures for Brent crude oil fell 90 cents (0.84 percent) to $106.29/bbl. (NYSEARCA:BNO). February gold futures declined $7.90 (0.63 percent) to $1,255.50 per ounce (NYSEARCA:GLD). The transportation sector drove into a ditch on Monday, as the Dow Jones Transportation Average fell 0.82 percent (NYSEARCA:IYT).
In Japan, the exchange rate for the yen continued to be the dominant factor in stock market activity. Nevertheless, the strengthening yen had to share the stage with a disappointing report on the nation’s trade deficit, which expanded in December to 1.302 trillion yen from November’s 1.293 trillion yen.
Economists were expecting a contraction to 1.256 trillion yen. Japanese stocks faded as the yen strengthened to 102.45 per dollar during the last hour of Monday’s trading session in Tokyo. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (NYSEARCA:FXY). Panasonic shares fell 3.26 percent on the Tokyo Stock Exchange. The Nikkei 225 Stock Average sank 2.51 percent to 15,005 (NYSEARCA:EWJ).
Friday’s global stock market bloodbath finally caught up with the country which started the swoon. Thursday’s release of the HSBC Flash China Manufacturing PMI (which hit a six-month low of 49.6) sent a panic signal to emerging market nations which rely in China to buy their exported commodities and raw materials for manufacturing.
What followed was a stock market slump, which happened everywhere except China. Nevertheless, on Monday the atmosphere was not so bullish behind the Great Wall. The Shanghai Composite Index dropped 1.03 percent to 2,033 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index sank 2.11 percent to 21,976 (NYSEARCA:EWH).
In Europe, stocks continued to decline, despite an upbeat German Business Climate Index from the Ifo Institute, which rose to 110.6 from December’s 109.5. The Euro STOXX 50 Index declined 0.45 percent to 3,014 — falling furhter below its 50-day moving average of 3,058. Its Relative Strength Index is 37.27 (NYSEARCA:FEZ).
Technical indicators revealed that the S&P 500 continued to fall below its 50-day moving average of 1,812 after declining 0.49 percent to finish Monday’s trading session at 1,781.
Its Relative Strength Index dropped from 36.82 to 34.54, creating the possibility that the S&P 500 could fall from “overbought” to “oversold” within a 30-day span. Most investors consider a RSI below 30 as an “oversold” signal. The MACD is taking a steep dive below the signal line, which would suggest that the S&P could continue to decline during the immediate future.
On Monday, only two sectors advanced and seven sectors declined. The technology sector took the hardest hit, falling 0.94 percent.
Consumer Discretionary (NYSEARCA:XLY): -0.39%
Technology: (NYSEARCA:XLK): -0.94%
Industrials (NYSEARCA:XLI): +0.10%
Materials: (NYSEARCA:XLB): -0.41%
Energy (NYSEARCA:XLE): -0.36%
Financials: (NYSEARCA:XLF): -0.62%
Utilities (NYSEARCA:XLU): +0.24%
Health Care: (NYSEARCA:XLV): -0.81%
Consumer Staples (NYSEARCA:XLP): -0.41%
Bottom line: Stocks declined moderately on Monday, as investors remained risk-averse ahead of this week’s FOMC monetary policy meeting.
John Nyaradi is the author of The ETF Investing Premium Newsletter.