The Week Ahead: Traders To Stay Focused In What Is Usually A Quiet Week

In my experience, the week before Christmas is a strange time in financial markets. In the London forex market, where I worked, it was a time to party hard, and it often seemed that there was more trading done in the “party popper” market than in currencies. (Yes, we made a market amongst ourselves in the small plastic things that send streamers into the air. Nobody wanted them, of course, nor did anyone want to have to go out and buy them for delivery. The art was to end up flat, but with a profit, not unlike in forex itself. Other than being an indication of the essential pointlessness of trading, the active market in party poppers in December indicates how bored we became with the markets that were supposed to hold our attention as Christmas approached.) This year though, even with the holidays imminent, equity traders at least are paying attention because they will become better informed on one of the two big reasons for two months of stock market volatility, maybe even on both, with a third reason possibly being added to the mix.

The crucial information will come on Wednesday, when the Federal Open Market Committee (FOMC), the Fed’s policy-making body, concludes its meeting and issues a statement indicating their decision on interest rates. There is also a chance that by the end of this week we will be better informed on the prospects for a resolution of America’s trade dispute with China. To this point, to describe the messages from the White House on that subject as “mixed” is to demonstrate an abundance of holiday season charity, but at some time I guess some form of consistency will break out. Add to that the threat of a government shutdown, and it is reasonable to assume that traders will have little time for made-up markets, no matter how much fun they are.

The Fed’s interest rate decision itself doesn’t hold much mystery. There is almost unanimous agreement that we will see a twenty-five-basis-point hike in the Fed Funds Rate this week, but the accompanying statement and subsequent press conference will be closely watched for signs of the committee’s intentions for rates next year. The early indications from public utterances by committee members are that the Fed’s attitude is softening somewhat, but even though they believe that to be justified, the board members find themselves in an unenviable position.

It is a question of image. There are some signs of growth slowing a little, which has probably prompted the change in language recently. Not only should that not be a surprise, but it is also probably seen by some FOMC members as a good thing. They are all too aware of the history of “boom and bust” caused in part by overstimulation of the economy following recessions, so they probably viewed the slowing of the growth rate that we are beginning to see as a feature of rate normalization, not a bug. To traders though, and to President Trump, it is definitely a bug.

The problem for the Fed is that now that both Wall Street and the White House have spoken—one via a big drop in stocks and one via Twitter—and any move away from their previously determined path could be seen as the Fed caving to pressure. In the short-term, that would presumably be well received by traders and investors. In the long run, however, it would create a credibility problem for an institution that is supposed to be above crass concerns like profits and politics. The obvious answer to that problem is for Jay Powell to return to the idea of future decisions being entirely dependent on data rather than driven by pre-determined targets as has seemed to be the case for most of this year. That suggests that neither the market’s nor Trump’s hissy fit is directly responsible for the change of heart, but it would open the door to a slowing of the monetary tightening process.

That could provide significant relief for stocks, which could also be helped by positive news regarding trade talks with China. The issue here, however, is that the market has come to expect positive spin from both sides on trade, but also to distrust it. Trump, in particular, has announced “great progress,” or even in one case an actual deal, in the past, and the market now takes comments like that in its stride but still reacts badly to any hint of problems. Trade then, is more likely to be a negative than a positive this week.

So too are the budget negotiations in Congress and the threat of a government shutdown. Domestic traders have seen enough shutdowns or near misses that any reaction will probably be relatively muted and short-lived but could still be disruptive in a market already spooked by the Fed and trade issues. Even more worrying is how the international markets will receive another demonstration of Congressional dysfunction and fiscal irresponsibility.

From that perspective, we are at the point where no possible good can come of this. A government shutdown, whoever you blame, is a waste of money and an indication of childish petulance, while the alternative of finding funding for a physical and metaphorical barrier to trade with South America is not any more encouraging. International investors have demonstrated before that they don’t care about the politics of these things; they care about the very real damage that these disputes can do to the economy, and this time will probably be no different.

It is likely that a market desperate for some holiday cheer will focus on the Fed’s decision this week, the thing that gives the best chance of some good news. There is, however, a very good chance that the positive effects of that will be offset by bad news elsewhere. Whatever happens, enough is going on this week to keep traders much more focused than is usual as Christmas nears.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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