Watching the central banks

Major risk events will really begin in the next two weeks, although in my view, Brexit is the key event to watch. 

The Fed
Source: Bloomberg

The result is expected to have the greatest impact on financial markets in June, even more so than the central bank meetings.


Fed and BoJ deliberate

In the coming week, we will see the Federal Reserve (The Fed) and Bank of Japan (BoJ) deciding on monetary policies. The outcome of their deliberation will be known on 16 June, with the FOMC rate decision released at 2.00am SGT. After recent developments, the June FOMC may not produce the same excitement as a couple of weeks ago, as shocking payrolls data derailed the probability of a rate hike. Market participants are pricing in a zero chance, according to the Fed fund futures, and pushing out expectations towards year end. What they will focus on is the language as well as the latest economic projections.

As things stand, the Fed is projecting at least two rate hikes this year. Judging from recent rhetoric, they may not deviate from this. Should the rate hike path be even slower, USD will doubtlessly be vulnerable to the downside.

Likewise, nobody is expecting any fireworks from the BoJ. To be sure, there is renewed pressure for the Bank to do more as hopes for the Fed to raise rates next week are dashed. For now, we will see increased intervention risk if the USD/JPY strengthens beyond 105. Furthermore, the BoJ leadership may wait for the upper house election to be over before making any new policy moves. That said, we are likely to see a dovish tone from governor Kuroda, keeping policy options on the table if necessary.

(See: What’s next for Japan?)


MSCI to include A-shares?

MSCI will announce its review of the 2016 annual market classification. What everyone wants to know is whether they have decided to include A-shares in their indices. China is the second biggest equity market in terms of market capitalisation after the US, and ahead of Japan. However, a full inclusion is almost impossible, while a 5% partial inclusion has been mooted since 2014.

Since the rejection from the 2015 review, China has addressed two out of the three key concerns. They have addressed concerns regarding the share suspension mechanism and beneficial ownership, but accessibility is still a problem. What’s important now is whether we are going to see a roadmap towards inclusion of A-shares. Needless to say, a partial inclusion will be a positive development for Chinese equity markets.

Meanwhile, investors will also look out for China credit data as well as industrial production and property prices for May. Elsewhere in Asia, Bank Indonesia will decide on monetary policy, where the consensus is for a no change to its benchmark interest rate at 6.75% (reference rate). It is likely that they will stand pat until it adopts a new policy framework in August. Australia’s jobs data and New Zealand’s Q1 GDP figures will be published. In Singapore, retail sales and NODX numbers will be monitored.

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