Market players have been looking ahead to the Fed interest rate decision on Wednesday afternoon and were caught by surprise when the indices jumped out of the recent trading range on a duo of positive headlines on Tuesday. First, Mario Draghi, the head of the European Central Bank, boosted stocks with very dovish comments. Second, President Donald Trump, boosted the indices further when he announced he will be meeting with Chinese Premier Xi Jinping at the G-20 meeting next week in Osaka.
Neither of these events are huge surprises, but the market has been more focused on the Fed announcement and did not anticipate the news. The trading range setup providing a nice launching platform for a move higher.
The buying slowed in the afternoon, but the indexes held on to sizable gains on very good breadth. This move looked very good technically, as there was both higher volume and a nice base of support.
This news makes for a very interesting setup for the Fed announcement tomorrow. The odds that the Fed would cut were already quite low and the news today of some progress on China trade makes it even more unlikely. But the issue now is whether a cut will occur at the July meeting.
The market has been celebrating the Fed's increased dovishness and if there is any backtracking in the policy statement or the press conference, it will probably not be well received. However, it is likely that Fed head, Jerome Powell, will stay very open to the idea of cuts and may even eliminate the word "patient" from the policy statement.
The bears have been burned many times trying to anticipate a "sell the news" reaction to Fed announcements, and I'm very hesitant to think that will see a big reversal this time.
I'll have more discussion in the morning. Have a good evening and I'll see you tomorrow.