Investors await FOMC decision

European markets traded lower in early trade on Thursday as investors awaited the outcome of a two-day FOMC meeting which could see the announcement of further stimulus measures to help strengthen the US economy.

The FTSE 100 was trading at 5770, with a loss of a 11 points, or 0.2%, with heavier losses seen in broader European indices such as the DAX and CAC.

We have seen clients look to square off some positions ahead of the FOMC decision, which could well be one of the most important FOMC decisions for months. A Reuters poll showed that 60% of analysts expected an announcement of more stimulus. Given the recent strength of US economic data – except last Friday’s labour data – it may well prove difficult for the Fed to announce an aggressive third phase of quantitative easing this time around. That said, Ben Bernanke has rarely shied away from making tough decisions and acting on the front foot. So we wait with bated breath. The press conference with Ben Bernanke after the announcement will need to be watched carefully but until the FOMC decision later this early evening, which takes place after the close of European markets, most investors will be looking to position themselves ahead of the announcement.

Make no mistake, the FOMC decision tonight will play a significant role in how European markets open tomorrow and indeed will likely have a strong influence on how equity markets trade over the next few weeks. A move to announce stimulus, depending on the aggressiveness shown, is likely to be well received by the markets and could see equities rally and the US dollar pressurised. A lack of announcement or a mere kicking of the can down the road by the Fed by remaining in ‘wait and see’ mode would be a disappointment, and could see investors move to lock in their recent gains and the US dollar rally.

The lack of significant economic data out today also means that most traders will be somewhat tunnel-visioned towards the FOMC meeting.

Investors continue to react to the very late breaking news yesterday that BAE Systems and EADS are in advanced talks about a merger to create a new company with a market capitalisation of $45bn. BAE Systems shares rallied an impressive 10% in the final 30 minutes of trading yesterday as news leaked that the firm was is in talks with EADS about a potential merger. Confirmation of advanced talks between the two firms came after the market close and we have seen both firms shares lose 5% this morning as investors have been quick to lock in their profits.

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