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Fed Minutes Sparks Massive Stock Market Rally

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

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Two central banks in Asia overnight both made comments that are geared towards weakening their respective currencies. South Korea's finance minister said that the government will begin introducing new measures to improve its stock market and support large exporters that have sizable amounts of exposure to Japan. The Japanese Yen has weakened by 8% recently, which has been pressuring South Korean exporters. Also, Japanese Prime Minister Shinzo Abe's lead adviser said that the government and Bank of Japan were in agreeance on the weakened level of the Yen, which some business and public officials had spoken out against recently.

US equities opened weaker and tested their lows from last Thursday. Because the S&P 500 (SPX) did not solidly break the 1926 low, some dip buyers appeared to try and test the market, and the index then traded flat until the FOMC minutes were released at 2:00pm ET. Following the minutes. The 45 point range in the SPX was the largest range since the Fed announced its first reduction in asset purchases at its December 18, 2013 meeting. By the end of the session the SPX had closed up 1.75%.

The release of the Fed minutes caused some very large movements in financial markets. In the minutes, one the two key passages were that the FOMC members were concerned its inflation outlook would be in jeopardy due to the recent strength in the USD. The other was that they think it would be prudent to err on the side of patience while awaiting further progress towards the committee's inflation and employment goals.

A number of different assets posted some very strong reactions after the release of the minutes. The difference between the 5-year and 30-year Treasury yields expanded by 8bps, a substantial change. Many short-term Treasury yields declined by very large amounts. The US dollar sold off by 0.70% from its pre-FOMC levels. The S&P 500 rose another 1.33% by the close of trading. Crude, however, did not rally despite the drop in the dollar.

Tomorrow's Financial Outlook

Tomorrow's trading day will be dominated by the various speeches from Fed members. Some will be looking to see if the speeches help to clarify what was released in the minutes today. However, ultimately the price action will be dictated by how investors digest the change in tone from the Fed today. Weekly jobless claims will be released tomorrow morning, but for the last six months they have rarely varied far from the 300K level. Wholesale inventories from August are also scheduled to be released.

Australia's employment data will be the first piece of economic data released overnight. Because of the market's sensitivity over the Aussie dollar and commodities, this will be a must watch piece of data. Also tomorrow is the Bank of England rate decision. Although it is unlikely that the central bank begins hiking rates at its meeting, that risk is growing at each successive meeting.

Pepsi (PEP) and Family Dollar (FDO) are scheduled to report earnings tomorrow. Keep an eye out for any FX-related comments from Pepsi in its earnings report.


Twitter: @Minyanville

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No positions in stocks mentioned.

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