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Markets Mixed Ahead of Major Fed Decision

Checking on gold, the euro, and bonds as Bernanke's announcement looms

by 6/20/2012 11:16:06 AM
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Many traders and economists will tell you that debt, currency, and commodity markets are "smarter" than equities, implying the inter-market action among those three is generally much more economically predictive than equities. On days like today, traders will often attempt to game a big announcement by looking at the movement within these markets. Today, there is a wide array of clues, none of which appear to add up to much of anything.

While some large institutions -- such as Goldman Sachs Group, Inc. (GS - 95.78) -- have come out and said they're expecting QE3, the commodity markets aren't agreeing with that. Should Ben Bernanke announce such policy at 12:30, gold will surely skyrocket.

At present time, the SPDR Gold Trust (ETF) (GLD - 155.45) is down more than 1%. The correlated move to a drop in gold is a dollar rally and euro selloff. On a day with gold down more than a percent, you'd expect a sizeable down move in the euro as well. This is not the case the euro is currently trading at 1.2710, up 0.2% on the day.

Bonds are trading slightly lower at present time, with the iShares Barclays 20+ Year Treas. Bond (ETF) (TLT - 124.80) down about 0.5% on the day, with equities mostly flat.

One potential outcome today is for Bernanke to announce more bond-buying programs similar to "Operation Twist." When this program was announced on September 21, 2011, TLT spiked dramatically, up nearly $4 from the previous day's close. Given today's action in TLT, the market isn't anticipating that, either.


The moral of the story is you can't look at one day's price action in multiple markets and extrapolate anything of significance. On the other hand, you can anecdotally observe expectations among market participants and attempt to fade the expectations of the crowd.

Given what I'm reading on Twitter, hearing on CNBC, and reading in most major market publications, "Markets will tank if no QE is announced today." Virtually every talking head has assumed that QE has already been priced in -- given what equity markets did on Monday and Tuesday -- and any disappointment in the announcement is expected to cause a major shock.

I couldn't disagree with this statement more. If everyone is expecting a market shock, should no QE be announced, then chances are that won't happen. One thing is for certain; we should get a very big reaction to whatever news surfaces today at lunchtime. Until then, it is prudent to assume any outcome is possible and keep an open mind.


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