Federal Reserve and Bank of Japan’s Policy Announcement will Shake Up Market

Stocks opened modestly higher amid wait-and-see action midday Tuesday ahead of Federal Reserve policy announcement Wednesday afternoon. The S&P 500 is up 6.67 points to 2145.79 and 5 points from session highs.

Treasury bonds are higher after the only economic stat of the day showed Housing Starts at a seasonally-adjusted rate of 1.142 million and below estimates of 1.186 million. Building Permits were also weaker-than-expected in August. The yield on the benchmark ten-year dipped to 1.67%, now down from multi-month highs of 1.73% just one week ago.

Crude oil has erased early losses and is up 25c to $44.10. Gold is flat at $1318.

On Wall Street, nine of ten market sectors are higher, led by Healthcare (XLV), Consumer Staples (XLP), and Industrials (XLI). Telecomm (IYZ) is seeing relative weakness.

CBOE Volatility Index (VIX) is off .16 to 15.47 amid light options volumes. Roughly 2.4 million calls and 2.3 million puts traded through the first two hours Tuesday. Projected volume for the day is 11.3 million contracts and 27% less than the one-month daily average.

Intel (INTC) Nov 41 calls, iShares Japan Fund (EWJ) Nov 12 puts, and EWJ Dec 12 puts.

Looking forward, the focus tomorrow will be on the Federal Reserve rate announcement at 13:00 Central Time. The Fed Fund’s market is currently placing the odds of a rate hike at just 20% and so it seems unlikely that officials will announce any major changes to monetary policy at the conclusion of its meeting.

However, there is a bit more uncertainty when it comes to the Bank of Japan’s policy update, which could potentially trigger volatility in equities overseas and in the currency markets overnight. Take a look at the chart below. It shows the recent price action of the iShares Japan Fund (EWJ) and, although the ETF is up today, it has been selling off in the two weeks leading up to the announcement. EWJ is a US-listed fund that holds shares of leading Japanese companies.

See Tradespoon’s Stock Forecast on iShares Japan ETF (EWJ)

Tradespoon’s Stock Forecast on iShares Japan ETF (EWJ)

The iShares Japan Fund seems to have found some support in recent trading sessions, right along a 50-day moving average. An uptrend off July lows is intact and shares are seeing a 1.6% uptick today. Interestingly, however, EWJ Nov 12 puts and Dec 12 puts are among the most active options across the market today, with more than 50,000 contracts traded in each, as some institutional players are likely hedging stock positions with EWJ puts ahead of the announcement.

In conclusion, financial markets will need to first navigate the BoJ decision before focus turns to the Federal Reserve. Then, whippy trading is likely once the announcement is made and investors will scrutinize the Fed’s post-meeting statement, as well as a press conference from Fed Head Janet Yellen, for clues regarding future monetary policy.

The S&P 500 is facing resistance at 2150 ahead of the news. Beyond that, the index is likely to see resistance at the 50-day moving average, 2169 and 2186 as well. Short-term support likely at 2144, 2139, and 2125.