All eyes on Wall Street will shift on Tuesday towards Washington, where the latest meeting of the Federal Reserve promises to shed some light on the central bank’s view of the ongoing recovery and any plans to give the U.S. economy an extra push heading into the final quarter of the year. Though the drama surrounding interest rate changes that usually accompanies Fed meetings will be absent–Bernanke & Co. are widely expected to keep benchmark rates at record lows–there is plenty of speculation in advance of the latest gathering of key policymakers.
The biggest question mark surrounds bond markets, which have been exhibiting significant volatility in recent sessions as traders form opinions about the Fed’s most likely course of action. Some expect that the central bank’s hand will ultimately be forced to implement further quantitative easing measures, most likely in the form of Treasury purchases. Last month the Fed began buying up relatively small quantities of Treasuries; on Monday it was scheduled to purchase bonds maturing between 2016 and 2020 in an effort to keep borrowing costs low for consumers and businesses.
Others point to a number of recent earnings reports and data releases as evidence that while underlying fundamentals remain weak, the economy is not on the verge of a collapse into double dip. If that scenario lines up with the Fed’s view, it could mean that further easing measures are unlikely in the short term. That could take some of the wind out of the sails of bond markets that have surged higher throughout 2010. “I think there is the real risk the Treasury market will be disappointed by the lack of further action from the Fed and we could push to higher rates,” said Christian Cooper, senior rates trader in New York at Jefferies & Co., to the Wall Street Journal. “Certainly the possibility of a growth outlook downgrade would be supportive of Treasurys, but I think the absence of additional accommodation will be the key driver of price action tomorrow and for the remainder of the week.”
The release of the Fed’s interest rate decision and accompanying statement should set the tone for markets for the remainder of the week, but some asset classes figure to be particularly impacted by the announcement. Below, we profile three ETFs that figure to be in focus during Tuesday’s session as Wall Street awaits the results of the latest Federal Reserve meeting [for more ETF ideas, sign up for our free ETF newsletter]:
- PowerShares DB 3x Long 25+ Year Treasury Bond ETN (LBND): This exchange-traded note offers a way for investors to achieve leveraged exposure to long-dated Treasuries, an asset class that has been one of the year’s top performers but has also been the subject of intensifying bubble concerns in recent weeks. If the Fed indicates it will pursue additional QE measures, LBND could get a nice boost. PowerShares and Deutsche Bank have also teamed up to offer a bear alternative to this ETN; SBND offers 3x inverse leveraged exposure to long-dated Treasuries.
- PowerShares DB USD Index Bullish (UUP): The greenback also figures to be in focus throughout trading, with some traders reporting sizable short positions in the dollar ahead of the Fed meeting. If additional asset purchase plans are announced, it could send the U.S. currency lower against major rivals. “That possibility has for now taken precedence over lingering sovereign-debt issues that continue to hang over the euro zone, analysts said, helping the common currency and the dollar’s other competitors,” writes Andrew Johnson.
- SPDR Gold Trust (GLD): Gold has also been rallying lately, its meteoric rise fueled by a wave of risk aversion washing over markets. The Fed’s decision tomorrow should end some of the uncertainty that has hung over markets in recent weeks, potentially knocking the precious metal back form record highs.
Disclosure: No positions at time of writing.