Global Macro: Markets Await Federal Reserve Answers

TheStreet.com

NEW YORK (TheStreet) -- Markets remain fairly muted in the days leading up to the release of the Federal Reserve minutes on Wednesday. In recent weeks, board members of the Federal Reserve have come out touting that there may be a need to rein in current easing measures. Although markets have entertained the idea, it seems unlikely that the Fed opts for such action. The recovery is going as well as anyone could have hoped, and data are just beginning to look up. With the economic landscape teetering on an edge, the Fed is unlikely to pull the carpets out from underneath.

A major catalyst to the current run higher has been fueled by the widely known Bernanke Put. This is merely a euphemism for the idea that the Federal Reserve is actively providing enough liquidity for financial markets to continue their rise higher, even in the face of tepid economic growth.

The chart below is of the S&P 100 Index Fund over the S&P Equal Weight ETF . This pair looks at larger-cap stocks in the S&P 500 index and whether the market is positioning in a defensive nature. This week, the pair has been biased slightly to the upside as markets have been left uncertain to the future value of the dollar. The pair will either propel higher, if the minutes show the possibility of removing simulative policy measures, or continue lower, if policy should be left in place.

The next pair is of the Barclays TIPS Bond Fund over the Barclays 7-10 Year Treasury Bond Fund . This pair measures inflation expectations and whether future rates are at risk of rising. The pair has continued its trend toward multi-year lows, which signals to the Fed that more easing is possible.

The focus should not be on rising rates, at this point; rather it should focus on solving the employment picture. Long-term unemployment and discouraged workers remain an issue, and furthering the monetary easing measures should allow for growth to continue its gradual trend higher. With fiscal policy not doing its part in aiding the recovery, it remains unlikely that Bernanke will similarly remove the little he has left to offer markets.

The dollar has continued higher as the economic picture has improved, and some have cited that fears of Federal Reserve tightening could be playing a role as well. The reality is that economies across the globe are in dire situations and have chosen wide-scale easing measures in an effort to provide some respite to their respective economies. The Fed chose to ease long ago, and has seen tangible economic benefits because of this.

The pair below is of the DB USD Index Bullish over an equal weight DB Commodity Index Tracking Fund . The price action highlights the thesis of a stronger dollar.

Although easing will most likely be continued, in the long run, the dollar remains on an upward trajectory, as foreign central banks continue to ease and the U.S. economic picture continues to brighten. This should weigh on commodities such as oil and gold, which are priced in dollars. The pair will continue higher, as long as the U.S. remains the strongest of the recovering economies.

The last pair is of SPDR Gold Trust over an equal-weight DB Commodity Index Tracking Fund. Gold has been on a strong down trend recently, as commodities have been pressured by a stronger dollar.

Gold has also fallen due to lower CPI projections worldwide. The pair spiked on a weaker dollar on Monday, but the continued uptrend in the dollar, due to reasons stated above, should push this pair below multi-year lows.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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