Asian equities edged up as investors navigated a minefield of 17 central bank meetings this week, as well as the anticipated early conclusion to US policy stimulus. Omicron remained a concern, with British Prime Minister Boris Johnson predicting a “tidal wave” of new cases of the coronavirus strain, despite markets’ reliance on vaccines to mitigate the economic impact.
This week, the Federal Reserve is largely expected to announce a speedier tapering of asset purchases and, as a result, an earlier start to interest rate hikes. It will also update the rate dot plots throughout the next few years. By May, the market had fully priced in a hike to 0.25 percent, with rates reaching 0.75 percent by the end of the year.
The European Central Bank, the Bank of England, and the Bank of Japan are also meeting, and each is working to normalize policy at its own, often glacial pace. The market’s muted reaction to Friday’s US inflation report implies that most of policy has already been priced in, though there is always the potential of a surprise or two with so many meetings.
“The view of global monetary policy in transition across various locations at varying rates is a recipe for volatility,” said John Briggs, global head of desk strategy at NatWest Markets. “One could argue that increasing risks around the virus are as well,” he added. “With all the noise and cross-currents, the most likely conclusion is volatility.”
After bouncing 1.7 percent last week, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) started with a 0.2 percent rise.The Nikkei (.N225) in Japan gained 1.0 percent after a poll of large manufacturers revealed that sentiment was at its highest level since late 2018.
find out more
With Nasdaq futures up 0.3 percent and S&P 500 futures up 0.2 percent, Wall Street hoped to extend its gains. The Treasury market has reacted calmly to the possibility of early Fed rises, maybe in the idea that it will result in lower inflation and a lower cash rate peak in the long run. Yields on 10-year notes rose 12 basis points last week, but they are still significantly below the year’s high of 1.776 percent, at 1.49 percent.
The idea of a more aggressive Fed has boosted the value of the US dollar, albeit it has recently levelled off. “We believe the bar for a hawkish surprise from the Fed is set high, so the dollar rally looks set to pause unless it delivers a major revision to its forward guidance,” said Jonathan Petersen, a market economist at Capital Economics.
“However, the greenback has room to rise further throughout the course of next year.” The dollar index stayed steady at 96.069 on Monday, after trading between 95.848 and 96.594 throughout the previous week. The dollar was slightly firmer against the yen at 113.52, although resistance awaited around 113.95, while the euro was steady at $1.1313 after spending the previous two weeks in a tight $1.1226/$1.1382 range.
Gold was stuck in a rut at $1,783 an ounce in commodity markets, having gained only a sliver of support from the high U.S. inflation data. Oil prices have continued to rise after breaking a six-week losing trend with gains of roughly 8% last week. Brent crude rose 84 cents to $75.99 a barrel early Monday, while U.S. crude gained 95 cents to $72.62.