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Fed Upgrades Economic Assessment, Ends QE; Risk Assets Weaken

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Today's financial recap and tomorrow's financial outlook.

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Chinese equities continued their ascent overnight for the second straight day. The Hong Kong Securities Regulator said that it had completed preparatory work to allow for foreign investors to trade on the domestic Shanghai exchange. Both the Shanghai Composite (SHCOMP) and Hang Seng Index (HSI) gained more than 1% in the overnight session and this boosted other emerging market equities as well. Copper, nickel, and aluminum prices have also rebounded as Chinese equities have begun to rally.

The Russian ruble continued to weaken again today, falling more than a percent against both the US dollar and Euro, and has fallen by 9% this month. Market participants are speculating that the continued fall in the Ruble has caused the country's central bank to spend too many of its FX reserves to defend its peg and they will cease doing so as soon as the beginning of November. Instead, they may hike rates by 150bps to offset this change in policy. The country's economy and financial system has been hurt greatly by the decline in crude oil prices.

The main event today was the FOMC meeting. The statement, released at 2pm ET, was received as hawkish by market participants. The Fed halted its asset purchase (QE) program due to a substantial improvement in the outlook for the labor market, upgraded its assessment of labor slack, and stated the risks of inflation persistently running below its 2% target have declined somewhat. Conversely, it stated that market-based inflation expectations have come down somewhat and that if inflation continued to run below normal that it would prompt it to delay future rate increases. Minnesota Fed President Narayana Kocherlakota dissented from the decision, saying that the decline in market inflation expectations should prompt the central bank to continue its QE program.

Risk assets initially responded negatively to the statement because participants had been expecting a more dovish statement. The S&P 500 (SPX) fell as much as 80bps in the 20 minutes after the statement, but ended up recovering those losses by the end of the day, led by gains in financials. Investors took higher intermediate interest rates to mean that banks would earn larger profits on new loans. Crude oil, which had risen as much as 1.8%, gave up 0.75% of those gains by the end of equity trading. Interest rates rose across all maturities. Energy and materials sectors both weakened significantly as a result. The 3-year Treasury was the worst performer today, its yield rose by 7bps to 0.90%.

Tomorrow's Financial Outlook

The main thing on investors' minds tomorrow will be digesting the FOMC statement from today. The advance third quarter GDP report will help dissect those views. Recently, poor durable goods orders and home sales have caused economists to revise their growth forecasts lower. The US is expected to grow by a quarterly annualized rate of 3.0% from 4.6% in the quarter prior. Additionally, Fed Chair Janet Yellen will speak at the Fed Board's National Summit on Diversity in the Economics Profession. The speech will be made from a prepared text and she will not take questions. It is unlikely, albeit possible, that she makes comments on monetary policy. 

Overseas there is equally important economic data out tomorrow. Germany will report preliminary October consumer price data, an economic datapoint that has become the most important each month. Prices are expected to rise by an annual rate of 0.9% for the month, up from 0.8% in the month prior. The broader eurozone data will be released on Friday. Also scheduled to be reported are the October German employment figures and UK home prices.

Eighty one major US companies are scheduled to report earnings tomorrow, the busiest day of the week. Notables include Time Warner Cable (TWC), Mastercard (MA), Mosaic (MOS), Kellogg (K), ConocoPhillips (COP), Ocwen Financial (OCN), Cigna (CI), Altria (ALTR), Starbucks (SBUX), LinkedIn (LNKD), and Marathon Petroleum (MPC).

Twitter: @Minyanville

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