Marching on the Spot

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,

Equity markets are drifting lower in Asia today following a non-descript session overnight in New York, with most asset classes contenting themselves to march on the spot ahead of the FOMC meeting, which concludes this evening. The semi-conductor squeeze has taken the wind out of bullish sentiment today, as Honda announced production halts in North America. Samsung hinted at product delays due to a lack of chips. Yet again, Mainland China markets are having a tough day as the authorities widen their big-tech crackdown to include Tencent. US Secretary of State Blinken said from Tokyo that China should not use coercion and aggression to get its way. The comments suggest that relations between the two superpowers remain as troubled as ever and does not bode well for the meeting tomorrow and Friday between senior officials of both countries. That state of affairs is adding to the glum mood on the China Mainland. Various legendary names of the investing space have come out with wildly divergent views on bond yields, inflation and their impact on bond markets and other asset classes in the past 24 hours. Such big names being so far apart, reflecting the underlying confusion in financial markets as a whole regarding the same. I suspect that bond vigilantes hoping for the Fed to blink on the dot plot and yield curve control front are going to be disappointed. A procession of Fed governors from the Chairman down, have maintained a consistent lower for longer mantra over the past weeks. Additionally, they have expressed comfort with steeper yield curves and higher inflation, the latter being a result of an economic recovery, not a wage/price spiral. Notably, they have beat the drums consistently about employment being far from target and total employment remaining massively below pre-Covid levels. If the Fed does not blink tonight, the markets will probably shift their expectations to the June meeting and send US bond yields higher anyway. That may lead to renewed pain in the tech space in the US and elsewhere and see the US Dollar move higher once again as the 2020 short squeeze continues. Both the greenback and gold have stubbornly refused to retreat in recent sessions, even after yields edged lower and investors returned to the FOMO-ness of the Nasdaq. Assuming the FOMC plays the game, the Bank of England and Bank of Japan should make the monetary policy decisions tomorrow and Friday, non-events, with no change expected. It will also create a sigh of relief for emerging market central banks with decisions over the next couple of days, like Indonesia. A Fed bond blink would be most keenly felt in emerging markets, notably those with dirty pegs (i.e. all of Asia) and large amounts of foreign-denominated debt and/or weak current accounts. Of course, markets may seize on a steady Fed to flock back to the buy-everything trade at the expense of the US Dollar, a risk I fully acknowledge. That inflation genie was bottled on Friday, only to re-emerge on Monday. I suspect its reluctance to be put away will be even shorter this time. More European Union members suspended the use of the AstraZeneca Covid-19 vaccine overnight over blood clot fears. That has weighed on European asset markets and the single currency, and with wave three appearing in some member nations, Europe and the Euro will continue to underperform. Notably, the United Kingdom has not made such a move, probably because they have already vaccinated the at-risk groups in question, such has been the programme's pace. The Astra/Zeneca saga and the third waves of infection will be another negative to add to the EU vaccination programme's debacle as a whole. I expect UK assets markets to outperform EU ones for much of 2021. Nor will the EU's vaccine nationalism be quickly forgotten by other trading partners. The European Union taking an already tough job and making it a slow-moving, bureaucratic mess is a well-known quantity. Investors will vote with their feet. Elsewhere though, financial markets look happy to march on the spot everywhere, as we await the silence of the Fed; or not. Asian equities edge lower Asian equities have eased over today's session as investors reduce exposure ahead of tonight's FOMC. Not helping sentiment was Blinken comments about Chinese aggression, and that, along with China's ongoing tech crackdown, has made Mainland exchanges today's underperformers. The overnight session was nondescript, with the S&P 500 edging 0.16% lower, the Nasdaq rising just 0.90%, and the Dow Jones retreating 0.39%. US index futures have edged lower with their Asian peers this morning. The Nikkei 225 has 0.17% lower, while Samsung's warning on semi-conductor shortages has seen the Kospi fall by 1.05%. In Mainland China, the Shanghai Composite has fallen 0.50%, with the CSI 200 down 0.25%. Both indexes were sharply lower a short time ago, suggesting that China's "national team" may be in supporting prices at the moment. Hong Kong has fallen 0.25%, while Taipei is 0.90% lower. Jakarta and Kuala Lumpur have lost 0.35%, while Singapore is unchanged. Australia's ASX 200 and All Ordinaries have eased by 0.45%. With investors on the side-lines, Asia is likely to finish modestly in the red, with tech-centric Taiwan and South Korea showing their sensitivity to China and global semi-conductors. Europe will likely open on an even more negative tone as the AstraZeneca suspensions and third waves of Covid sap sentiment across the continent. The US Dollar remains firm The dollar index climbed just 0.03% to 91.87 overnight, rising another 0.06% to 91.92 in dull trading in Asia. Notably, though, the US Dollar remains resilient even as bond tensions ease temporarily. The US Dollars next directional move will come after the FOMC tonight, but its recent price action hints that inflation fears, and higher yield concerns remain front and centre for currency markets. Covid-19's resurgence in parts of Europe, and their vaccine woes, are most heavily weighing on the Euro amongst the major currencies. EUR/USD fell to 1.1900 overnight, leaving it vulnerable to further losses initially targeting 1.1840. A daily close below 1.1800 implies deeper losses to the 1.1600 area. Like yesterday, Asian currencies have reversed the overnight price action. Today regional currencies have retreated versus the US Dollar after rallying overnight. The net result is noisy range trading, a situation that will continue into the FOMC. A surge in bond yields this evening after the meeting will leave Asian currencies nursing losses tomorrow morning. Oil continues to mark time Oil eased ever so slightly overnight, Brent crude falling just 0.40% to $68.50 a barrel, and WTI falling 0.60% to $64.80 a barrel. Those losses have been reversed in Asia, Brent crude climbing to $68.70 a barrel and WTI to $65.50 a barrel. The European woes have temporarily taken the wind from oil's sails as markets price in a slightly lower global consumption because of it. The net result is one of directionless range trading over the past few sessions as oil markets also await the FOMC. Brent crude is content bounce around in a $67.50 to $70.00 a barrel range. Meanwhile, WTI is anchored in a $64.00 to $66.00 a barrel range. Instead of trying to second-guess the FOMC, I retain the view that a daily close above or below the present ranges will signal a directional move of at least $2.0 a barrel. I remain confident that a wall of physical buyers will meet any material dips in oil prices. Gold continues to tease bullish investors Gold finished unchanged at $1732.00 an ounce overnight, climbing to $1735.50 in a lifeless Asian session. Gold is clearly in a pre-FOMC holding pattern, but for once, it is circling from a position of strength. Gold's price action continues to be supportive as it has shrugged off higher US yields and a stronger US Dollar this week. Gold needs to clear $1740.00 an ounce, and most significantly, the breakout at $1760.00 an ounce to give bullish investors the hope that the worst is over for gold. Support remains at $1720.00 and $1700.00 an ounce, and gold looks likely to stay in a $1725.00 to $1740.00 an ounce range ahead of the FOMC. Tomorrow we will have a much better picture of whether gold's longer-term downward correction is over, or if it was yet another false dawn.

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