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On Wednesday, US stocks continued gaining in value, whereas treasury bond yields remained stable after the US Fed announced its intention to start the tapering of the QE program. As a result, the US dollar advanced against its major rivals.
The S&P 500 jumped for the first time in the last five trading sessions as concerns about China Evergrande defaulting ebbed. The yield of the treasury bonds with a shorter maturity fell more than the yield of debt obligations. This happened after the revisions of "dot-plot forecasts for federal funds target showed a 2022 median of 0.25%, up from 0.125% prior, while 2023 rate forecasts were also dragged higher." As a result, the S&P 500 increased by 1.05% at the end of the US trade.
"If you take a step back, the Fed's stance is still accommodative and it's reasonable for the Fed to want to return to a state of normalcy if the economy is as robust as the data suggests," Mike Loewengart, managing director of investment strategy at E*Trade Financial, said.
"And given the recent volatility, it's likely that investors are viewing the taper projection and potential 2022 rate hikes as a vote of confidence that the recovery is on track," he added.
If the progress in achieving the Fed's targeted levels in employment and inflation "continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted," the US central bank's policy-setting Federal Open Market Committee said on Wednesday.
At the press conference, Fed Chair Jerome Powell said that the reversal of the QE policy might end by the middle of 2022. Most members of the Committee support a gradual approach. Thus, the US regulator may make an announcement as early as November. In this case, a taper process will last eight months.
Investors are extremely focused on the timeline for tapering stimulus and shifts in expectations for interest-rate increases. The fact is that investors got used to the regulator's stimulus measures that support asset prices. The revision followed the period of market instability caused by growing fears of China Evergrande defaulting.
"What markets are relieved by was that given the events of this week in terms of China, Evergrande, the debt ceiling dysfunction, some of the growth slowdown," Michael Arone, chief investment strategist at State Street Global Advisors' US SPDR business, said.
"Some of what we've been seeing in markets. I think the risk was that the Fed would announce tapering and a timeline today. I think that would have been an unexpected surprise that would have created some volatility and some negative reaction by investors, and that didn't happen, and so investors are happy," he added.
This week, traders are advised to take a close look at following events:
- BoE's decision on the key interest rate – Thursday;
- Germany's Manufacturing PMI - Thursday;
- US unemployment claims – Thursday;
- Federal Reserve Chairman Jerome Powell Speaks – Friday.
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