Caution the watchword as US Fed ponders interest rate pace
SYDNEY: A hush settled over financial markets on Wednesday as investors counted down to a likely hike in US interest rates and guidance on how many more to expect this year, while trade war fears kept export nations’ currencies on edge.
MSCI’s broadest index of AsiaPacific shares outside Japan edged up 0.5 per cent after a run of losses, tracking overnight gains on Wall Street.
Chinese shares were a bit more buoyant with Hong Kong’s Hang Seng index gaining 1.2 per cent as real estate firms posted stellar profits.
E-Mini futures for the S&P 500 inched up 0.1 per cent, while FTSE futures were off a fraction.
Markets are convinced the Federal Reserve will announce a quarter point hike at 1800 GMT, but are less sure if it will signal three or four for the year as a whole.
“A significant weighting towards four hikes this year may well cause both equity and bond markets to sell off,” Jonathan Sheridan, analyst at FIIG Securities in Sydney, said.
“The concerns here are that the Fed overshoots with raising rates into a faltering economy,” Sheridan added.
“If this opinion takes hold then we may well see falling longer term rates and a flatter yield curve, and it would also be negative for equities as it increases the chances of a recession.”
The Fed has raised rates five times since it began tightening policy in late 2015. Yet the dollar has not really responded, ending 2017 down about 10 per cent against a basket of currencies.
“We remind readers that every single FOMC rate hike this cycle has been a ‘dovish hike’ and the USD has declined on the day(s) post the rise,” Richard Grace, chief currency strategist at Commonwealth Bank of Australia wrote in a note to clients.
On Wednesday, the dollar index held near three-week highs around at 90.267. Against the Japanese yen, the greenback hovered near a one-week top at 106.46. Trade war fears
Another major overhang for financial markets is the spectre of a global trade war.
US President Donald Trump is expected to unveil up to $60 billion in import duties on Chinese goods by Friday. The move comes after Trump imposed tariffs on imported steel and aluminium earlier this month.
Investors are worried Trump’s actions could escalate into a fullblown trade war if China and other countries retaliate with similar or harsher measures, threatening global growth.
To add to these concerns, a meeting of finance ministers and central banks of the world’s 20 biggest economies this week failed to diffuse the threat.