Wednesday Look Ahead: Markets to Weigh Fed, Obama

President Obama's State of the Union address and the Fed's Wednesday afternoon statement should both play up the improving U.S. economy.

Doug Armand | Stone | Getty Images

But the bond market was more attuned to the President's words. Obama proposed a five-year freeze on some government spending and struck a centrist tone in a speech designed to prove he has fiscal discipline and can work with resurgent Republicans.

"Rightly or wrongly, the shift in the market's perception is that Obama will adopt a posture of fiscal austerity as opposed to spending. The connection is that spending is associated with more debt and therefore risk of higher inflation," wrote Jim Caron, global head of interest rate strategy at Morgan Stanley.

Bond prices rose and yields slipped, with the 10-year yield ending at 3.32 percent. The stock market Tuesday recovered just before the close, after a mostly down day. The Dow finished just 3 points lower at 11,977. The S&P 500 , edging up less than a point, finished in positive territory at 1291.

In an early release of his remarks, President Obama did comment on the economy and noted the stock market has "come roaring back. Corporate profits are up. The economy is growing again." He also spoke to the fact that progress is measured by the job market, which continues to lag.

Fed officials, meanwhile,convened Tuesday for the first day of their two-day January meeting. The Fed is not expected to take any action but will likely upgrade its assessment of the economy while sending the message that things have not improved enough to end the Fed's quantitative easing program. Under that program, the Fed has pledged to buy $600 billion in Treasury securities. In theory, so-called QE would keep rates low while encouraging banks to lend. Another effect has been to drive money into riskier assets, like stocks.

The "residue" of Tuesday night's State of the Union speech will be what's important to stock traders Wednesday, said Art Cashin, director of floor operations at UBS. "They'll be mining through the State of the Union to see if there's any winners or losers there," he said.

John Spinello, Treasury strategist at Jefferies, said even with the Fed meeting, the market may be more focused on President Obama's remarks, and whatever he says about cost cutting and spending will be important.

The Treasury auctions $35 billion in 5-year notes Wednesday, and Spinello said the 5-year auctions have a track record of poor performance on the day of Fed meetings. "It depends where the market is going into the auction," he said.

The only data of note Wednesday is housing starts for December, at 8:30 a.m.

Earnings reports are expected from Boeing, Conoco Phillips, United Technologies, Occidental Petroleum, United Continental, Valero Energy, U.S. Airways, General Dynamics, Rockwell Automation, Exelon, St. Jude Medical, WellPoint Health and Xerox. After-the-bell reports are expected from Starbucks, Netflix, Symantec, Varian Medical, Logitech, Lam Research, Motorola Mobility, Citrix and ETrade.


Cooling Commodities

The euro Tuesday rose against the dollar, reaching a two-month high on optimism that Europe may successfully resolve its Sovereign debt crisis. The euro was at 1.3705 before finishing the session at 1.3695. It moved higher after the first issue of 5 billion euros in European Financial Stability Facility debt was heavily over subscribed.

Commodities saw some heavy losses, as investors took profits across the board.Oil fell nearly 2 percent to $86.19 per barrel, and gold fell to its lowest level in three months Gold futures slumped $12.20 to $1,332 an ounce.

Barclays Capital commodities analyst Suki Cooper said the selling in gold could continue for several weeks but she maintains a first quarter average price on gold of $1,410.

"It could last for a few weeks, but for 2011 as a whole, we still maintain a positive outlook," she said. She expects gold to hit its high quarterly average for the year in the third quarter, with an average of $1,560, before dropping to an average $1,520 in the fourth quarter.

She said there have been net redemptions from gold funds, but that was similar to the activity in early 2010 and that long term investors are still on board. "I think the CFTC data shows that in terms of fresh short positions they're at their highest in 5-1/2 years," she said, but added that net longs positions are still quite high as well.

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