No matter what the US Federal Reserve does on Thursday about interest rates – raising them for the first time in nearly a decade or leaving them unchanged – most strategists say stock, bond and currency markets may experience a wild ride after the US central bank’s decision.
“The market reaction will likely be violent either way,” said Aaron Kohli, interest rate strategist at BMO Capital Markets in New York.
A Reuters poll of 80 economists released on Wednesday showed a slight majority now say the Fed will hold off on a increase.
Below is a snapshot of how major groups of players in the U.S. stock, bond and currency markets have prepared ahead of Thursday, based on the latest data from the Federal Reserve, Commodity Futures Trading Commission and iMoneynet:
Wall Street dealers and institutional money managers were looking for a stock market rally based on their net long positions in e-mini S&P futures on Sept. 8, while hedge funds were net short in anticipation of a sell-off.
A week ago, big bond funds were net long on longer-dated Treasury futures <0#TY:> <0#US:> <0#AUL:>, and net short on Eurodollar <0#ED:> and shorter-dated Treasury futures <0#TU:>, implying they expected the Fed to raise rates.
Dealers and hedge funds took an opposite position, net short on longer-dated Treasury futures and net long on Eurodollar and shorter-dated futures, signaling they anticipate a dovish Fed message.
Asset managers and hedge funds were net short on the yen and euro, implying they were long on the dollar in the likelihood of a Fed rate hike.
Wall Street dealers were net long on the yen and euro, suggesting they expected the dollar to fall if the Fed remains on hold.
Foreign banks have reduced their holdings of U.S. bonds at the Fed for four consecutive weeks to $3.327 trillion last Wednesday, the lowest since May 20.
There has been speculation that Asian central banks have been selling their dollar reserves to stabilize their currencies and to stem capital outflows because of worries about a weakening Chinese economy and a Fed rate increase.
In anticipation of possibly higher rates after Thursday, some cash investors pulled money out of money market funds. Their assets fell to $2.670 trillion latest week, the least since July 29, according to iMoneynet.