All eyes will be on the end of the key FOMC meeting on Wednesday, with any changes in QE likely to take center stage. The current program calls for $85 billion in Treasury and MBS purchases each month, but analysts are looking for this to get cut in a range of about $5-$20 billion a month.
In fact, according to a recent WSJ poll, close to two-thirds of economists surveyed believe that the taper will begin this week. If this actually happens, it will mark an important point in the QE experiment and it will begin the long process of unwinding the Fed balance sheet at a reasonable clip.
The size of the move, however, could have a huge impact on the markets. Since many—but not a unanimous number—believe that a taper is coming, a ‘no taper this time’ statement from the Fed could definitely move markets.
Meanwhile, a huge degree of tapering could also shock stocks, especially since, according to the WSJ, nearly 40% of surveyed economists believe that the markets haven’t fully priced in a September move (see High Dividend ETFs to Buy Even If the Fed Tapers).
Given this, we could definitely see some movement out of the upcoming Fed decision, so investors should pay close attention to any changes in outlook from the Fed, or an alteration to the tapering program.
These changes could have a drastic impact not only on investor perception, but several key market sectors in particular. We have highlighted four such segments below, any of which could be in for some heavy volume trading when the Fed announcement is inevitably released:
Treasury securities have especially been in focus as of late, thanks to a surging yield for benchmark government debt. Yields on 10-year government bonds have jumped to nearly 3%, nearly doubling since the start of May.
This incredible surge started to take place once investors began to embrace the idea of some Fed tapering. The change in perception made investors reevaluate their stance on treasury bonds, and another shift in outlook could happen after this meeting as well.
While there are a number of Treasury bond ETFs to watch in this space, one that is likely to be a great barometer of mid-term debt is the iShares 7-10 Year Treasury Bond ETF (IEF). As you might be able to guess from the name, it focuses on treasury bonds that mature between seven and ten years from now, with a big concentration in debt maturing in 2022.
This fund has struggled as rates have continued to rise over the past three months, as the price for IEF has declined by 5.2%. Meanwhile, in terms of yield, this product pays out 2.5% in 30-Day SEC terms, a decent amount considering the effective duration of 7.6 years.
Gold is a safe haven currency that tends to move inversely of the dollar. So, a strong dollar can push gold lower while a weak greenback can generally make for solid gains in the yellow metal.
A robust tapering policy could suggest a stronger dollar which may have a negative impact on gold. Meanwhile, if the Fed refrains from tapering at this meeting, we could see gold move higher on the news.
Two ways to play gold are with the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU). Both are extremely popular, though GLD has more assets and volume while is a cheaper choice (also see Gold Mining ETF Investing Explained).
The two gold ETFs have lost over 20% YTD, including nearly 5% losses in the past three month time frame. Both could rise if tapering doesn’t happen though, while a Zacks ETF Rank of 3 for both suggests that performances might not be that great in the long term, though short term volatility seems likely.