UBS strategist 4 likely outcomes Fed meet
9:33a ET djones
This week, the SPDR S&P 500 ETF Trust (NYSE: SPY) has added 1.75 percent in advance of the Fed's Thursday decision.
UBS strategist Themos Fiotakis forecasted that "a decision to raise rates would be a surprise," but that the tightening path ahead is more important than the immediate move.
Ultimately, Fiotakis added that a dovish surprise would be good for stocks and credit and bad for bonds. The opposite result would "come at a cost to markets."
UBS' Themos Fiotakis said that Thursday's FOMC meeting is "one of the most uncertain" in recent history. Though there were certainly more important policy meetings in the past, "rarely has there been such a divide in opinion among economists and market participants on what the Fed is most likely to do."
Fiotakis used game theory to discover four potential paths for policy: (1) unchanged rates/ dovish outlook; (2) unchanged rates/ hawkish outlook; (3) hike/ dovish outlook; and (4) hike/ hawkish outlook.
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If UBS had to peg the results, Fiotakis would think a decision to raise interest rates would be a "surprise," meaning that results one and two are most likely. When it comes to market outlook, Fiotakis said that results two and three "would have a limited market impact in the medium term."
So, looking at the market results from either results one or four, Fiotakis said that the former would be "good for stocks and credit; medium term, bad for bonds." The latter would come "at a cost to markets."
Breaking that down a little further, Fiotakis forecasted that the longer the Fed waits, the "more likely a sell-off in long bonds of up to 50bps." In equity markets, a "relief rally" would be most likely in financials, technology and healthcare.
If the Fed surprises with a hike and hawkish tone, long-end rates would "jump higher," while the market could sell off credit and equities.
The greatest deception men suffer is from their own opinions.
~ Leonardo da Vinci
