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Daily Agenda: The FOMC in the Spotlight

Investors wait to see how how global-market turmoil shapes Fed policy; Shell shareholders approve BG merger; Apple misses earnings estimates; Karl Haeling on bearish extremes.

At 2 p.m. today, the Federal Open Market Committee will announce the Federal Reserve’s most recent decision on interest rates. While the strong consensus among strategists and investors is that the FOMC will make no change in rate policy, the accompanying commentary is of great interest for any sign that storm clouds gathering abroad may influence U.S. policymakers’ future decisions. A marginal rebound in both the Conference Board consumer sentiment measures and oil futures yesterday did little to alter market-risk narratives focused on slow global demand. Bond-market pricing suggests that many investors anticipate that the Fed may take a slower route to “normal” interest rates than the most recent dot-plot chart suggests.

Shell shareholders approve BG deal. On Wednesday, Royal Dutch Shell announced that the company has received shareholder approval to move ahead with its propose acquisition of BG Group. The merger, valued at more than $60 billion in market capitalization terms, was initially announced in April 2015 before oil prices sank globally. Shell chief executive Ben van Beurden had defended the deal in the face of shareholder protests, including resistance from Standard Life. Van Beurden argued that BG’s liquid natural gas unit represents an attractive strategic opportunity on a long-term basis.

More stimulus on tap for Brazil. Multiple media outlets have reported that Brazilian Finance Minister Nelson Barbosa will unveil a new series of stimulus measures during a meeting of the Council for Economic Development to combat ongoing recession and inflation. Separately, Brazilian federal police today conducted a series of raids relating involving offshore money laundering connected to the massive Petrabras investigation that has ensnared dozens of high-ranking officials and which has undermined confidence in the administration of President Dilma Rousseff.

Apple earnings disappoint. Cupertino, California-based tech giant Apple posted fiscal first-quarter results Tuesday that came in below analysts’ expectations and prior company guidance with revenues of $75.9 billion for the period. Critical iPhone sales figures were weaker than anticipated on slowing demand in developing Asia. One bright spot was an improvement in gross margins aided by currency swings.

RBS announces billions in writedowns. The Royal Bank of Scotland Group today became the latest major bank to warn shareholders that it will need to make massive payments to settle regulatory charges. Total writedowns will come in at over $3.5 billion, according to bank management, combining anticipated settlements and losses stemming from the bank’s wealth-management unit.

Portfolio Perspective: Bearish Sentiment Reaches Extremes

Tuesday’s rally represented one of the very few days this year that U.S. stocks not only closed higher but did so after opening stronger, extending the gains through mid-morning and then holding on to nearly all of them during the afternoon. Equity traders have made a noticeable shift in strategy recently to one oriented toward selling rallies. The failure of this to be rewarded Tuesday thus represents one additional step toward ending the bear move in risk assets this year.

The process of bottoming is likely to be an erratic, uneven one. But we believe the recent price action does represent an attempt toward greater overall stability, at least relative to the steady bearish pounding stocks and commodities saw in recent weeks.

We continue to believe that while the world faces enormous disinflation pressures and a slowing economy, bearish extremes in sentiment and market positioning have developed. Since the financial crisis several years ago, we have felt that as long as the global economy avoids a true meltdown, U.S. equities will generally perform positively and the U.S. economy should grow 2 percent again this year. And after a bone-crunching bear market, commodities are probably now in a similar position. We do think though that U.S. equities have more upside potential than commodities generally. While commodities could still jump sharply as part of a upward correction near-term, there probably is not much upward potential once the bearish extreme in short positions unwind.

Immediately ahead, the market’s focus Wednesday will probably involve the release of the FOMC policy statement. There has been a moderate amount of discussion in the markets that the statement will be dovish in terms of its characterization of economic activity and/or global risks to growth. While this is certainly possible, we do expect the Fed to be very cautious in changing the language surrounding this.

After the Fed was criticized for being too sensitive to global market movements last September when it decided to leave rates unchanged, we believe the Fed will want to show as little flip-flop as possible now. So while the FOMC statement now will probably reflect some downgrading of the economic growth outlook, we expect it to still try to express it within the context of an overall optimistic message.

Our perception coming into 2016 was for two rate hikes with a 50 percent chance of a third. Currently, we believe we could still see two rate hikes but little chance for a third. We also don’t expect one before the June FOMC meeting. Even if Wednesday’s policy statement is more hawkish than the market expects and FOMC members officially still see themselves raising rates four times, reality won’t let it happen in the end.

Karl Haeling is a vice president at Landesbank Baden-Württemberg in New York.

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