US Markets Rally Ahead of Federal Reserve Policy Report

US markets closed higher on Tuesday. The S&P 500 (SPX) rallied 14.85 points, or 0.8%, to 1,998.98. The Dow Jones Industrial Average (DJI) rose 100.83 points, or 0.6%, to 17,131.97, after briefly touching an intraday record high. The Nasdaq Composite (RIXF) added 33.86 points, or 0.8%, to 4,552.76. Investor attention is focused on the Federal Reserve policy meeting which opened Tuesday. Recent economic reports indicated continued recovery and improving outlook for US economy, and pronouncements by some Federal Reserve officials led investors to believe that a shift to tighter monetary policy is likely to happen sooner than previously announced by the Federal Reserve. Investors are particularly expecting to get more specific clues on Federal Reserve’s earlier statement about the need to support the economy through easy monetary policy for “considerable time”. The stream of positive economic data had led Fed chair Janet Yellen and other officials to acknowledge that it may be possible to hike interest rates sooner than previously anticipated sometime during 2015. At the two-day Federal Open Market Committee meeting the central bank officials will be debating a potential change in its interest rate guidance and a plan for exiting the extraordinary easy monetary policy in recent history. The expert consensus is that details on the exit plan are nearly complete, and it is the timing of the rate hike that will be the central issue. It is also expected that fresh economic and interest rate projections extending through 2017 will be released at the policy meeting. As some media reports suggested that the Federal may keep the words “considerable time” in its policy statement, but qualify them, markets interpreted this as indication that the Federal Reserve will keep interest rates low for a while. This newly gained optimism about Fed’s policy and a rally in energy companies drove markets higher ahead of the Fed policy statement today, and resulted in S&P 500 biggest one-day gain in 4 weeks. Trading was active, with about 6.12 billion shares traded on US markets, above 5.6 billion average so far this month.

Oil prices rallied after OPEC’s secretary general Abdalla el-Badri reportedly said he expects oil prices to recover later this year. WTI for October delivery gained $1.96 to $94.88 yesterday on the New York Mercantile Exchange, the highest close since Sept. 3. The volume of all futures traded was about 55 percent above the 100-day average. Prices have decreased 3.8 percent this year. Responding to falling demand, Saudi Arabia cut its crude supply by 408,000 barrels a day in August, the biggest reduction since 2012, a submission made by the country to OPEC shows. OPEC officials, including Saudi Arabian Oil Minister Ali Al-Naimi, previously said “they see no urgent need to respond to oil’s decline.” Reflecting slow recovery in global demand, as indicated by the International Energy Agency monthly report, OPEC predicts in a September 10 report that demand for OPEC’s oil will drop to 29.2 million barrels a day in 2015 from 29.5 million this year.

After falling to $1,225.67 an ounce on September 15, gold for immediate delivery rose to $1,235.55 yesterday in Singapore. Gold for December delivery traded at $1,238 an ounce on the Comex in New York from $1,236.70 yesterday. Holdings in the SPDR Gold Trust, the biggest bullion-backed exchange-traded product, contracted yesterday to 784.22 metric tons, the least since June. Investors are watching anxiously to see what the Fed decides on timing of interest rate hike as improving outlook for US economy warrants shifting to more hawkish stance sooner than anticipated, adding pressure to precious metals.