Pre-Fed, UBS Prefers Downside Bets as Goldman Warns of Noise

(Bloomberg) -- In case anyone hasn’t heard, the Federal Reserve has a rate decision at 2 p.m. New York time Wednesday. Markets are pricing in a quarter-point cut with a small chance of a half-point move, while President Donald Trump is seeking a “large” cut.

Read about how if Fed Chair Powell gives an inch, bond traders may ask for a mile.

Here are some views from strategists about what to watch before and after the announcement:

UBS Group AG

“We see a high bar in risk pricing ahead of the FOMC this week,” said Stuart Kaiser. “The S&P 500 is at an all-time high, the VIX is low, and the moves in Europe around the ECB suggest investors will be hard to please. We prefer owning short-dated SPX options with a modest bias toward puts.”

Read more about how the ECB’s Draghi wasn’t dovish enough for traders.

“Retail volatility remains lowest in our model with Metals and Mining and Financials volatility each more than one point low. We see value in options on those sectors ahead of the FOMC.”

Goldman Sachs Group Inc.

Volatility expectations for this week’s FOMC and ISM releases are low, strategists including Vishal Vivek and John Marshall wrote in a note. The average Financials stock is pricing a +/-1.4% move through Friday, below the historical combined move of +/-2.2% on past FOMC and ISM releases, they said. The average ETF is pricing a +/-1.1% move through Friday, relative to a historical move of +/-1.5% on FOMC and ISM days. Options on the iShares MSCI Brazil ETF (ticker EWZ) and the Energy Select Sector SPDR Fund (ticker XLE) appear “particularly inexpensive,” they said.

In Asian stocks, “we would not expect as positive a market reaction now compared to past episodes,” said analysts including Timothy Moe in a separate note. “We continue to expect a mildly positive but noisy return environment as markets navigate the opposing forces of trade uncertainty and soft growth on one hand and easy financial conditions, fair valuation and light investor positioning on the other.”

The bank continues to favor the themes of secure dividend yields, reasonably priced growth and positive earnings surprises.

Read more about what emerging-market investors are thinking into the Fed decision.

UBS Global Wealth Management

“We do expect the Fed to leave the door open to further rate actions dependent upon developments on the macro front,” said Mike Ryan. “Market reactions will likely be mixed in the short term as the focus begins to shift back to corporate earnings and Friday’s employment report.”

Mizuho Bank Ltd.

With the Fed’s forward risk assessment tilted to the downside, the policy sweet spot requires that a 25 basis point rate cut be supplemented by dovish talk/backstops, said Vishnu Varathan. So, a post-FOMC “hawkish correction” -- from a 50 basis point rate-cut bets unwind -- should be mild; insofar that a sufficient dovish anchor limits the upswing in U.S. Treasury yield and the dollar.

Bleakley Financial Group LLC

“At this point it’s somewhat binary,” said Peter Boockvar. “Stocks want to hear about more rate cuts this year and won’t like a one-and-done message.”

JPMorgan Asset Management

“The FOMC will likely take the route of cutting the federal funds rate by 25 basis points, but emphasize that this is not the start of a new round of unlimited support to markets in their commentary,” said Hannah Anderson. “Investors should welcome this temperance, but caution voiced by the Fed often has a way of getting lost in the deluge of headlines investors have to contend with.”

--With assistance from Ruth Carson.

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar, Dave Liedtka

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