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Traders will for guidance from Fed speech, developments out of Iraq

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TORONTO - A meeting of the Federal Reserve will be in focus this week as traders look to see if the U.S. central bank makes any changes to its massive bond purchase program that has supported markets in the world's biggest economy.

The Federal Open Market Committee is set to release its latest statement on monetary policy on Wednesday. It's expected that Fed chair Janet Yellen will announce that the bank will cut $10 billion from its monthly bond purchases, keeping it on track for reducing the program by $45 billion by the end of the year.

Although such news won't be a surprise to most, senior economist Jennifer Lee of BMO Capital Markets said traders are eager to hear Yellen's comments following the announcement. Of particular interest will be her take on the strength of the U.S. recovery in areas like jobs, home prices and consumer spending.

The Fed's monthly bond buyback program has helped lift markets and kept long-term interest rates low, but the bank has long warned that it can't be in place forever and has been tapering the program as signs of strength in the U.S. economy continue to emerge.

Although Lee anticipates Yellen will take a more positive tone on the economy, she will likely remain cautious in her approach.

The main reason? Jobs.

"The U.S. has been suddenly turning out new jobs each month and has regained all the jobs loss since the Great Recession (of 2008-09), but jobless rates remain elevated," she said.

"Far too many people are still considered to be long-term unemployed."

In addition to the Fed announcement, markets will also be watching for developments in Iraq and how it may affect global oil prices. Last week, benchmark U.S. crude rose to nearly US$107 a barrel after al-Qaida inspired militants captured two key Iraqi cities and vowed to march on Baghdad, raising fears for global supplies.

The July crude contract on the New York mercantile Exchange closed Friday at US$106.91 a barrel, up 38 cents.

Andrew Pyle, a senior wealth adviser at Scotia McLeod in Peterborough, Ont., said if the situation worsens in Iraq there is a chance the Fed might consider pausing its cuts to the stimulus until the conflict is resolved.

"If we were to see a major destabilization of the Middle East as a result of what's happening in Iraq, it's possible the Fed may refrain from tapering," he said.

Either way, a threat to oil supplies will leave an impact on North American equities, which some analysts already say are overvalued after reaching near-record levels this year.

"You've already got a market that is vulnerable to a pullback," Pyle said. "If you throw in something like Iraq, which has serious ramifications for energy, energy costs, gasoline prices and the impact on consumers and business, (then) suddenly you have a very good catalyst for stocks to retreat even further."

The TSX ended last week up 91.98 points or 1.10 per cent, pushing it past the 15,000 mark but leaving it still a few points shy of the index's record close set in June 2008, just before the Great Recession sent stocks plummeting.

U.S. markets also gained ground last week with the Dow industrials ahead by 0.8 per cent.

Meanwhile, August bullion climbed 10 cents Friday to US$1,274.10 an ounce, while July copper advanced a penny to US$3.03 a pound.

Follow @LindaNguyenTO on Twitter.

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