Asia markets hushed in countdown to Fed lift off

Sydney, Dec 15 (BUS): Asian markets were in a precarious position on Wednesday as the world waited to hear from the US Federal Reserve on when it would stop buying assets and start raising interest rates, which could increase pressure on peers to follow.

Futures are already priced at the end of tapering off by March and first rising to 0.25% in May or June, with rates approaching 0.75% by the end of the year.

Bank of America’s latest survey of fund managers shows that they favor ending tapering in April and only twice in 2022, leaving them more vulnerable to hawkish expectations.

Also critical is the final destination for rates as the markets are currently priced to a peak of only 1.5-1.75%, a level that is likely not the highest in inflation.

Noted Alan Ruskin, macro strategist at Deutsche Bank, according to Reuters.

“However, we have never seen a peak cycle where real rates have never been above zero, which means that the expected final rate in the market is very low and possibly very low.”

If Fed members agree and draw a much higher peak, that will challenge the high valuations of stocks and the meager yields offered by Treasuries. At the moment, the bonds indicate that liquidity rates will not exceed 1.8% over the next 30 years.

The rapid spread of the Omicron variant is an additional complication that could make the Fed less hawkish, although officials have recently seemed more concerned about persistent inflation than the pandemic.

Whatever the Fed decides, it will set benchmarks for the central banks of the European Union, the United Kingdom and Japan when they meet this week, adding to pressure for further tightening in emerging markets.

Several potential pitfalls kept investors nervous and MSCI’s broadest index of Asia Pacific shares outside Japan fell 0.1% in slow trade.

Japan’s Nikkei rose 0.1% and South Korea’s lost 0.3%. Chinese retail sales and industrial production data are also due later on Wednesday, followed by US retail sales.

Both the Nasdaq and S&P 500 futures contracts were flat in early trading, after losing steam overnight.

Treasury yields were higher following an unexpectedly strong US producer price inflation reading overnight.

Ten-year bond yields are up 1.44%, but still a long way from the recent peak of 1.693%. The yield curve has continued its flat trend as investors are betting that an early start to Fed tightening will slow inflation in the long run.

The possibility of higher interest rates in the short term supported the US dollar, particularly against the euro and the yen as monetary policy is expected to lag.

The single currency slipped back to $1.1256 and again approached its recent lows of $1.1184. The dollar rose to 113.71 yen and approached the resistance at 113.95.

The dollar index rose to 96.554, with the bulls eyeing the November peak of 96.938.

The risk of higher interest rates has been a drag on gold, which does not provide a stable return, and left it marginal at $1,772 an ounce.

Oil prices fell after the International Energy Agency (IEA) said that the spread of the Corona virus variant Omicron will affect the recovery of global fuel demand.

US crude lost 34 cents in early trading to stand at $70.39 a barrel.

HF