ASX 200 and beyond: 3 key insights from Wednesday, March 17

The ASX 200 finishes out the session lower as markets wait for the Fed’s view on economy, rates and yields.

  • 'The ASX 200 endures a broad-based sell-off led by cyclicals
  • Asian stock markets drop as traders position for the Fed
  • Markets wait for Fed’s view on economy, rates and yields

ASX 200 drops, Asian stocks trade mixed

The ASX 200 was a major laggard in the Asian region on Wednesday, March 17, closing down 31.9 points or 0.47%, at the 6,795 level. The day’s trade was exemplified by the broad-based play out of risk assets: by the late afternoon, 8 of 11 sectors were trading in negative territory, with energy and materials stocks the major laggards.

Things didn’t change much at the market close, with 6 out of 11 sectors finishing out the day in the red.

The rebound in tech-stocks has continued, with the IT sector the market’s leader for the day, with the market getting some support from strength in the telcos. The All Technology index finished out the day 0.45% lower, at 2,722 points.

Collins Foods, Unibail-Rodamco-Westfield, and Clinuvel were the best performing ASX-listed equities during Wednesday's session, while Corporate Travel Management, Inghams Group and Omni Bridgeway were the worst performing.

Elsewhere, Asian markets endured a generally soggy day’s trade, with stocks trading mixed, as market participants gear-up for the conclusion of the US Federal Reserve’s policy meeting. Volatility has been reasonably subdued. But price action does wreak of de-risking ahead of what’s shaping as a potentially high volatility event.

The battle between growth and value has stalled as US Treasury yields held near their 1-year highs, with both sides heading to their corners for a breather as the markets await cues from the Fed for what to do next.

AUD/USD remains range bound

In broader markets, and price action has been lacklustre, especially in the FX world, which is being driven by indecision about the US Dollar ahead of tonight’s US Fed meeting. The US Dollar Index is trading 0.1 per cent higher at time of writing, mostly courtesy to a drop in the Euro and a steadiness in the Yen. While the AUD/USD remains stubbornly range bound and floating around the mid-0.7700 handle.

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What is the Fed to do?

As far as tonight’s Fed meeting goes, for all the anticipation about this particular meeting, the central bank is almost certain not to adjust policy. However, that fact doesn’t diminish its importance, with several key issues to drive the market reaction from it. Those are:

  • Economic forecasts: the Fed is expected to upgraded its outlook for the US economy, in sympathy with upgrades already made amongst the analyst community, and will reflect a recent run of decent economic data, as well as the passage of US President Joe Biden’s latest stimulus package.
  • The Dot Plots: coupled with the new economic forecasts will be the Fed’s latest estimates for the path of the Federal Funds rate. Although recent Fed commentary has focused on the need to keep rates low for some time, interest rate markets are pricing in a high chance of a Fed hike by late-2022 – the markets will be watching to see if any Fed members may be sympathetic to this idea.
  • Inflation and bond yields: concern has grown in the markets that higher inflationary pressures will push bond yields materially higher, potentially depressing financial conditions and undermining equity valuations. Market participants will be assessing the Fed’s views on the inflation outlook, and gauging what appetite the Fed may have in leading on yields, if necessary.

It’s quite likely the Fed will look to take a neutral line at this meeting, consistent with its recent messaging that it sees little need to remove policy support as it remains focused on supporting the economic recovery – even if that recovering is looking stronger than previously forecast.

There’s the chance the markets may be left high and dry on the question of controlling rates at the long-end – which may prove the source of volatility around this Fed meeting. Afterall, with stocks at record highs and financial conditions still supportive, there’s little immediate impetus for the Fed to waste ammunition on a pain point that’s not yet been met.

Looking to how overseas markets ought to open within the current backdrop, and our prices are pointing to a mixed night’s trade. European indices are looking generally mixed, if not slightly skewed to the upside, while US indices are looking at a flat open.

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