Futures climbed steadily overnight, with the S&P up nearly 10 handles vs. fair value. We are looking at a nice up open ahead of the mid-term elections, but it remains to be seen if we get any decisive action after range bound trading over the past several sessions. The rise in equities comes in response to strength in the European markets overnight and weakness in the dollar, which is currently down about 0.5%. Voting is underway and the Fed FOMC begins its two-day meeting today, so we are closing to getting some resolution on these much-anticipated events that have been strangling any real volatility out of this market.
The Republicans are expected to wrest back control of the House and trim their deficit considerably in the Senate in today’s mid-term elections, a scenario that will likely lend itself to gridlock over the next two years of the Obama presidency. Gridlock and greater Republican influence are likely to lead to a more big business-friendly tone from Washington, where President Obama’s falling out with major business leaders has been well-documented. However, the outcome of the elections is taking a back seat to the upcoming announcement from the Federal Reserve.
The FOMC begins its landmark meeting at 10am EST today, and the consensus is that the committee will unveil a QE2 package of around $500 billion, considerably less than original forecasts denominated in the trillions. Conventional wisdom would say the market could be disappointed with ‘QE2 lite’, but those expectations have been around for the last couple of weeks as economists across the board have denounced plans for asset purchases on a massive scale. Almost all economic numbers over the past month have been better than expected and marked significant jumps from the prior month. Yesterday morning the ISM Manufacturing survey came in at 56.9, which came against the expected reading of 54.5 and marked a jump from the September reading of 54.4. Any reading above 50 marks expansion. As David Tepper said several weeks ago, the Fed has entered into an implicit contract as a safety net. Either the economy will either recover on its own, or the Fed will be there to save the day. Right now we are seeing expansion, and it would be wise for the Fed to save its ammunition and continue to use language to express its readiness to intervene if such intervention is warranted.
As earnings season rolls on, MasterCard (NYSE:MA) and BP plc (NYSE:BP) both exceeded Street expectations and are trading sharply higher this morning. MasterCard is up around 5% in pre-market trading after the announcement, which reflected increased spending from consumers as the economy recovers. BP is up more mildly at around 1% pre-market. The Q3 report was impressive as rising oil prices offset Gulf oil spill costs for Q3, but analysts were caught off-guard as BP set aside an additional $7.7 billion to deal with the aftermath. Today, the markets could waffle in a tight range ahead of the election results and the FOMC announcement, if you are heavily invested long-term perhaps hedge your bets and if you are an active trader stay light and nimble. We should get some range resolution by the end of the week.
