Markets Anxiously Await The Most Critical Week
Investors are awaiting three decisions that are poised to have drastic effects on markets, in what is shaping up to be one of the most crucial weeks for the financial sector in nearly a decade.
1) Tuesday’s Meeting Of The Federal Open Market Committee (FOMC)
The federal funds rate is the overnight rate on loans between banks, and it is effectively the single most influential interest rate in the U.S. economy, as it has widespread affects on domestic monetary and financial conditions. The fed rate bears on employment, economic growth, and inflation.
The FOMC, the branch of the Federal Reserve Board that decides monetary policy, is scheduled to meet Tuesday and Wednesday to discuss the possibility of raising the federal funds rate.
Federal Reserve Chair Janet Yellen hasn’t made any attempts to conceal her personal fiscal policy prescriptions, insisting that the Fed has not been relaxed in its approach to raising the federal funds rate. Yellen announced in December that the federal funds rate would rise by a quarter of a point, marking only the second increase in the benchmark interest rate since 2007.
In the months after the December rate increase, the market looks to be in great shape. The Dow posted its second thousand point jump, now sitting at over 21,000 for the first time in the benchmark index’s history. The S&P 500 set an all-time intra-day trading record in early March, tracking above 2,400 for the first time. Friday’s robust jobs report showed a strengthening labor market and revealed mounting wage pressure, as payrolls grew by 235,000.
Taking all of these factors into consideration, the consensus among economists and financial experts is that the Fed will raise short-term interest rates after the conclusion of its meeting Wednesday.
Fed economists have said the the decision to keep the funds rate steady thus far comes after the economy did not meet the Fed’s goal of 2 percent inflation set last December. Policymakers appear to be changing their tune, according to Yellen’s most recent statements to the press. Speaking after the Fed’s Chicago meeting Mar. 3, Yellen said that the “economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective.”
Wednesday’s decision is important not only because of its effects in the short-term, but because it will signal much anticipated rate increases in June and possibly the fall of 2017. An uptick in futures trading in recent weeks shows that investors are nearly certain the FOMC will pull the trigger on a rate increase Wednesday. As for June’s meeting, some 60 percent of economists surveyed by The Wall Street Journal believe the Fed will raise interest rates in its policy meeting June 13.
2) The Dutch Election
Voters in The Netherlands will head to the polls Wednesday to decide their next prime minister. The outcome of this election could very well be a litmus test for the future of the European project. The question on everyone’s mind is: will voters choose to elect Geert Wilders, a populist, anti-immigration, anti-European Union leader that is performing well in the polls, or will voters choose to reelect center-right prime minister Mark Rutte.
Wilders doesn’t have to win to make a significant impact on the political landscape of Europe. Currently, the man is polling second, behind Rutte. If he outperforms what polling-houses and pundits are currently predicting, it could work to legitimize claims promulgated after the election of President Donald Trump that polls, as they are currently conducted, are not an accurate predictor of voter behavior.
All eyes are locked on the French election, presently dominated by populist candidate Marine Le Pen. If Wilders does outperform current expectations, it could have some effect on how France’s election plays out. A strong performance for Wilders could give credence to the idea that the populist movements in Europe are not simply fleeting, and do hold some weight.
Investors will likely have a few concerns regarding Le Pen, as many of the policies she promotes could raise uncertainty, and, in turn, make investments in the French economy more risky in the short term. For instance, Le Pen promises to pull France out of the EU if she wins the election, much like British Prime Minister Theresa May pledged. Leaving the EU could drastically impact the health and financial stability of the European experiment. France is the second-largest economy in the EU. Leaving it would trigger a lengthy renegotiation process that could work to make French investments less attractive.
Le Pen also promised to issue new currency as an alternative to the Euro, and to devalue it to reportedly boost exports and bolster the French economy. Typically, investors are weary of nations, like China, that manipulate their currencies.
Alternatively, if Wilders does not perform well, it could work to sooth concerns that a populist movement is taking over Europe. As a result, the Dutch election is something investors will likely be monitoring.
3) Brexit Vote
Theresa May has made it clear that the U.K. will enter negotiations with the European Union about its departure by the end of March. Members of the British Parliament are set to pass a bill as early as Monday afternoon to allow Theresa May to trigger Article 50, and start the formal process of Great Britain extricating itself form the EU.
The terms that U.K. leadership and EU member states are able to negotiate could have some large effects on markets. During the negotiation process, the U.K. will not be able to carry out any bilateral trade agreements between EU member states and other nations, like the U.S.
If Great Britain is able to leave the EU, it will then have to renegotiate trade deals with its member states. The process is not likely to be expedient, since trade agreements have to be ratified by the governing bodies of all 28 nations.
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