As we found out from the minutes of the last meeting, most policymakers judged that it could be appropriate to start reducing the pace of asset purchases this year.
That and the Fed’s previous communications had led to speculation that Powell could provide the roadmap for tapering on Friday at the Jackson Hole symposium, causing the dollar to strengthen and the stock market rally to cool, with commodities also being undermined by the dollar rally.
However, since the FOMC’s meeting in July, virus cases have been rising rapidly in the US and some other parts of the world, such as Australia and Southeast Asia. Consumer sentiment has taken a hit, with the University of Michigan’s closely-watched consumer confidence index dropping to its lowest level since 2011 as we found out earlier this month.
Reports of restaurant bookings falling, as well as moderating credit and debit card transactions have provided further evidence that the services sector may have been impacted by the delta variant more than expected.
Then, with the Jackson Hole shifting to a virtual format, market participants have speculated that the Fed will wait a little longer before tapering, keeping the goldilocks scenario intact for the stock markets.
But are we going to get a week of two halves?
Have the markets got ahead of themselves? Perhaps we might see some profit-taking over the next couple of days as investors make a more sober assessment of the whole situation. They may realise that even if the Fed does not announce the specifics of tapering on Friday, it will likely do so in the upcoming meetings – perhaps in September.
So, bond purchases will likely be tapered before the end of the year in any case. Therefore, the bigger risk is we may see a pullback for stocks or perhaps a full-on correction as investors start taking profit again with most of the positivity already priced in. What’s more, there is the risk that Powell may deliver a hawkish surprise on Friday.
Crude and copper rally likely to stall
Of course, it is not all about the Fed. The FDA’s approval of Pfizer’s Covid vaccine has raised hopes that more people who were previously unwilling to get vaccinated will soon have to take the shot as large businesses and government organisations will probably make it mandatory for workers to be vaccinated. This should reduce the risks of future lockdowns and restrictions, even if the vaccines are not 100% effective. As a result, traders have speculated that demand for oil should rise as more people are likely to travel if fully inoculated.
With the raised prospects of travel and tourism returning to more normal levels, oil prices surged higher at the start of the week, which also explains why we have seen energy-related stocks, as well as consumer discretionary and materials, rise sharply. Copper prices have also received a boost amid the positive sentiment.
But in the immediate future, the rapid increases in delta cases and hospitalisations means demand could remain soft for a while. Thus, crude oil may be unable to sustain its rally and could fall back if Delta cases continue to rise, especially with the US driving season now being at its twilight.
Copper could also come under pressure if the dollar resumes higher or risk sentiment turns sour again – both very much possible.