After the Fed minutes, stocks will need watching at the US open

The theme running around markets today is the FOMC minutes and the Fed reducing the balance sheet, and what that means for asset prices, especially in stocks.

The key passage for markets yesterday was the one on stock prices;

"Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months."

The resulting action in stock markets shouldn't have been a surprise.

S&P 15m chart

In relative terms, that drop isn't a game changer but the question will be whether investors will now be spooked by the Fed's comments and start bailing out of equities.

In real terms, the winding down of the balance sheet shouldn't be a big market event. It's been planned for a long time and the Fed has already been running programs like reverse repos as part of the wind down. There is no rush to unwind the balance sheet either. This is the boring end of the party where tidying up the mess has to be done. It shouldn't really affect markets too much, unless the market starts making a big thing out of it.

Fed policy was put in place to get through a crisis. Yes, stock prices have gained massively but the hope was that the US would come out of the other side with an economy that would justify those stock prices. I've been wondering recently what the next big bone for the market to chew on will be and trading that equation is going to be it, by the looks of things.

Institutional investors shouldn't really be spooked by the Fed comments but your 'mom and pop' investors might be, which is why today's stock market open could be an important one, and one that could kick FX out of this malaise.

At the moment, futures aren't signalling any problems. S&P futures are +2.7 ticks, Dow +28, though all that can change in a heart beat or an hour into the day.

Long and short, watch the open with a bit more awareness than you might any other day as what news is hot on the lips of traders, can be hot on the ends of their trading fingers.