By JJ Kinahan,Senior Contributor,Win McNamee

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Markets are waiting on the Federal Reserve to announce a decision on interest rates this Wednesday. (Photo by Win McNamee/Getty Images)
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Key Takeaways

Fed Rate Cut Expected, Investors Focus On Powell’s Forward Guidance

Government Shutdown Risks Rising Despite Markets Showing Limited Fear

IPO Strength Signals Appetite, But Valuations Could Become Overextended

Stocks posted gains last week with the S&P 500 gaining 0.8% and Nasdaq Composite adding 0.9%. Small caps were relatively unchanged while the Dow Jones Industrial Average dropped 0.5%. Markets were primarily concerned with economic data reports and how they might affect this week’s Federal Reserve Open Market Committee meeting. We also saw a number of Initial Public Offerings (IPOs) last week, but this week will primarily revolve around the Fed and then Friday’s triple witching.

Following the latest reports on inflation, expectations for a quarter-point rate cut, which were already high, became all but solidified. As of premarket, the CME Fed Watch Tool has the probability of a 25-basis point cut at 96%. Interestingly, the remaining 4% are calling for a half point cut. I think this is very interesting. While the expectations for a half point cut are small, there is clearly some hope the Fed will be more aggressive than most anticipate. I would argue a quarter point cut has already been priced into equities at this point. Unless the Fed surprises with a half point cut or strongly suggests another cut will come at the October meeting, a case could be made stocks are a bit out over their skis. Therefore, I think investors should pay more attention to what Fed Chair Powell has to say than simply focusing on the size of the cut.

At the same time markets are focused on interest rates, we are just over two weeks away from a possible government shutdown. These showdowns used to inject a reasonable amount of fear into markets, but with VIX under 15, I think those concerns have largely passed. However, with midterms just a year away and Democrats looking to enforce some accountability on President Trump, I would argue the chances of a shutdown are better than they have been recently. Various prediction markets have the possibility of a shutdown at 55%. At a time when job losses are mounting and inflation isn’t coming down; a government shutdown could become a crisis event and is worth monitoring.

Taking a look at some individual stocks, we had several IPOs last week including Klarna and Gemini Space Station. While both issues closed off their highs of the week, the relative strength of the IPOs was a bullish sign as investors seem to have an appetite for new assets. If I have any concern here, it’s simply that the valuations avoid becoming extended, like we saw in the tech bubble in the 1990s. New public companies are a good thing so long as they don’t become “memeified”. Shares of Gemini are indicated higher this morning by nearly 5%, while Klarna is up just under 1%.

Shares of Nvidia are lower by over 1% in premarket. China accused the chipmaker of violating an anti-monopoly law following an initial probe. In what has already proven to be turbulent negotiations, the accusation could further destabilize trade talks. I’ll be monitoring this story for any significant updates.

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Tesla stock is indicated higher by almost 8%. That comes following news Elon Musk purchased 2.5 million shares on Friday, worth an estimated $1billion. The purchase is being touted as a sign of confidence in Elon’s dedication to the EV company.

A couple other odds and ends worth mentioning include weakness in the U.S. dollar, strength in gold and triple witching this Friday. Gold is up 30% this year. Normally considered a safe haven and hedge against inflation, the move here is staggering and could be a potential red flag. We have seen very little in the way of a pullback in gold this year, especially since Trump’s trade policy announcement back in April. It presents a legitimate question as to whether or not gold is predicting a slowing economy and/or inflation. At the same time, we’ve seen the U.S. dollar continue to weaken. That could be a result of expected interest rate cuts, but if inflation in in fact going to get worse, as gold may be suggesting, a weakening dollar will only exacerbate the situation.

Finally, this week is triple witching. Listed options, futures and futures options will all expire on Friday. Any expiration can cause volatility, but a triple witching has potential to introduce an exaggerated amount of volatility. Although the VIX remains subdued, it’s worth noting the September VIX futures, are trading two and half points below October VIX futures and that could foreshadow some choppy trading ahead. As always, I would stick with your investing plan and long-term objectives.

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