By Saqib Iqbal Ahmed and Carolina Mandl
NEW YORK (Reuters) – Traders in global financial markets are facing extraordinary uncertainty as they await the U.S. Federal Reserve’s expected rate cut on Wednesday, setting up markets for a burst of volatility.
Major brokerages expect the Fed to lower interest rates by 25 basis points at the end of its two-day monetary policy meeting, even as financial markets price in a good chance of policymakers starting the easing cycle with a 50-bps reduction.
Fed funds futures, which reflect the market’s expectations for the future of monetary policy, have rallied to push the chance of a 50-basis-point rate cut to 61%, against 30% a week ago. The odds narrowed sharply after media reports revived the prospect of a more aggressive easing.
These last-minute moves have left Fed funds futures projecting a record lack of clarity about a Federal Open Market Committee decision, according to a BofA Global Research report.
“It’s very rare that you have the market divided on a Fed action 24 hours before the event,” George Bory, chief investment strategist for fixed income at Allspring, said.
“Usually, at this point in time, the Fed has communicated, or has led the market to expect, a very specific action,” Bory said, adding that given the decision is highly uncertain, positioning is unlikely to be deep.
While Fed decisions often move markets, the relatively even divide between traders expecting 25 bps versus 50 bps makes it likely that no matter what the Fed delivers it is going to take many traders by surprise.
The Fed move is likely to be the largest surprise, relative to market pricing two days ahead of a decision, in over 15 years, according to a Deutsche Bank analysis.
“No one’s quite sure … people have landed on different estimates, guesstimates if you will, and right about half of those people are going to be wrong,” said Matt Weller, head of market research at StoneX.
“So they’re going to have to adjust their positions … One way or another, we could see pretty big moves in the market,” Weller said.
RIPPLE EFFECT
Asset classes from stocks, currencies and fixed income could all log swings in the immediate aftermath of the decision, investors said.
Stock options are pricing an about 1.1% swing, in either direction, for the on Wednesday, according to options analytics service ORATS.
The recent rally in U.S. stocks — the S&P 500 has advanced for seven straight sessions, rising 4.2% — leaves stocks ill placed to deal…
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