Markets trim risks ahead of FOMC

Markets are keeping a low profile ahead of the Federal Open Market Committee (FOMC) with investors cutting risk from their portfolios on Wednesday. 

Federal Reserve
Source: Bloomberg

Equity indices across Asia flashed red, led by Chinese markets. Trading volume were also tapering off.

To be sure, chances of a rate move in the October FOMC meeting is extremely remote. It is widely expected to be a non-event for financial markets, as a combination of soft inflation and recent economic data dented the policymakers’ confidence to hike interest rate.

At this meeting, there is no press conference or updates to the economic forecasts, which means market focus will be on any changes to the language of the policy meeting statement.

The September FOMC decision was considered a close call, and several Fed officials were eager to prevent the idea of the first hike this year from slipping out of market expectations, recent spate of economic data proved to be working against the Fed rhetoric.

In any case, they actually build expectations of further delays to policy tightening. In fact, there were some, such as Fed governor Lael Brainard, who argued that substantial financial tightening has already taken place in the US, through the channels of exchange rate and financial market. Ms Brainard asserted that the effect is equivalent to ‘a couple of rate increases’.

Indeed, some committee members have downplayed prospects of a policy move before the end of the year. This is why the October meeting statement will be critical for the markets to crystallise their views about the Fed. Sustained signals of the possibility of a December move would suggest that the FOMC hawks have not given up from their positions. This may include core members like chair Janet Yellen and vice-chair Stanley Fischer.

The dollar traded steadily in the past few sessions, after the dovish ECB helped lifted the greenback last Thursday. The dollar index is now seen at high-96 levels. Risks are tilting to the downside for the USD if the FOMC statement turns out to be rather dovish.

The magnitude of the retreat will depend on how much weight the market placed on the Fed’s delay to its first rate hike, relative to expectations of additional ECB easing in December.

Meanwhile, underwhelming Australian inflation data raised prospects of more action from the Reserve Bank of Australia (RBA). The Aussie tumbled 1% on algorithm selling. Should expectations start to build ahead of next week’s RBA meeting, we could see AUD/USD retest below the 0.70 region.

With that said, my colleague pointed out that recent RBA statements do not indicate that more rate cuts are in the pipeline – for the time being. You also have to consider that if FOMC definitely push rate hike expectations into next year, we would likely see some relief for AUD/USD.

Asian equities were under pressure for most of Wednesday, as negative sentiments from overnight markets were extended to the Far East. China was among the worst hit, with the CSI 300 dropping 1.9%. The Shanghai Composite slipped below 3400, but still supported above the 50-day moving average of 3313. 

There appeared to be some selloff in defence-related counters, after yesterday’s rally, prompted by the incident where a US warship was sighted near the disputed Spratly Islands.

The Hang Seng index fell below 23,000 at last look, dragged by an over 1% drop in the H shares. The Straits Times Index (STI) weakened below 3050 in tandem with regional sentiments.


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