Volatility spikes as Fed aims to reduce balance sheet

By Margaret Yang, CMC Markets
A stock market pullback was seen last night as the Federal Reserve officers expressed their willingness to begin the balance sheet cut later this year in the FOMC meeting minutes released last night, triggering broad profit-taking activities within risky asset classes. Nasdaq lost 0.58% and S&P 500 index closed 0.31% lower. The Dollar index eased intra-day gain and closed flat at around 100.30 area. The “risk-off” sentiment is likely to have an impact on Asian markets today.
The Fed built up its eye-watering S$4.5 tn worth of bond and Mortgage-backed securities portfolio during the financial crisis. Probably, it is now the time to slowly unwind its portfolio as economic growth picks up momentum and the jobs market is near full employment. This expectation, amidst a rising interest rate cycle, would continue to push Federal fund rates higher and strengthen the US dollar in the longer term.
Today, the markets will be watching the first meeting between the US and Chinese leaders in Florida, or what people have called the “Xi-Trump summit”. This meeting is probably the most important US-China summits in decades, and it will have significant impact on global trade and security. Chinese media described this meeting to be ‘historical’, and it will give future directions to “Sino-US” relations in the new era.
Some key topics include trade, currencies and the issues with North Korea. The markets have their focus on, and are also nervous about these topics ahead of this summit. Trump’s protectionism and Xi’s strong diplomatic stance could rub out sparks and potentially surprise the market. However, the chance of that happening is relatively small as China will ensure the summit between the two leaders is “a complete success”.
US S&P 500 –Cash

Margaret Yang Yan, CFA, is a market analyst for CMC Markets Singapore.