Asian shares drops: Investors brace for central bank-packed week

Reuters: Asian shares drops and the dollar was firm on Monday as investors looked ahead to policy meetings from the Federal Reserve, the Bank of Japan and other central banks this week.

GLOBAL MARKETS: ASIAN SHARES DROP

Europe is set for a subdued open, with EUROSTOXX 50 futures off 0.1%. S&P 500 futures advanced 0.2% while Nasdaq futures edged up 0.1%. Oil prices hit fresh 10-month peaks, further stoking inflationary pressures. U.S. West Texas Intermediate crude futures gained 0.8% to $91.52, their highest level since November, while Brent crude futures rose 0.7% to $94.55 per barrel.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7%. Japan’s Nikkei is closed for a public holiday. Technology shares in the region retreated, with Taiwan’s TSMC, the world’s top contract chipmaker, falling 3% after Reuters reported that it has told its major suppliers to delay the delivery of high-end chipmaking equipment. In China, better-than-expected factory output and retail sales in the world’s second largest economy have aided Chinese bluechips which were up 0.4%. But property sector woes dragged Hong Kong’s Hang Seng (.HSI) 1% lower. Zhongrong International Trust, which has exposure to Chinese property developers, said over the weekend it was unable to make payments on some trust products on time. “Despite the encouraging sign of stabilization, the property market continues to be the missing puzzle piece in the economic picture,” said Tommy Xie, head of Greater China Research at OCBC Bank.

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“The on-the-ground feedback indicates a rise in property viewing activities; however, most prospective buyers are not in a hurry to finalize deals due to the increasing supply of apartments post relaxation.” Shares in embattled China Evergrande Group fell as much as 25% after police in southern China detained some staff at its wealth management unit, though they later pared losses to be down 1.6%. This week, global central banks will take centre stage, with five of those overseeing the 10 most heavily traded currencies holding rate-setting meetings. A swathe of emerging market central banks will also hold meetings.

Markets are fully priced for a second straight pause from the Fed on Wednesday, with its targeted range expected to be unchanged at 5.25% to 5.5%, so the focus will be on the updated economic and rates projections. They see about 80 basis points of cuts next year. “In theory, the FOMC meeting should be a low-volatility affair, but it is a risk that needs to be managed,” said Chris Weston, head of research at Pepperstone. Weston added that if the Fed revises up its rate projections for 2024, that would see rate cuts being priced out, resulting in renewed interest in the U.S. dollar and downward pressure on global shares.

On Thursday, Bank of England is tipped to hike for the 15th time and take benchmark borrowing costs to 5.5%. Bank of Japan is the key risk event on Friday. Markets are looking for any signs that the BOJ could be moving away from its ultra-loose policy faster than previously thought, after recent comments by Governor Kazuo Ueda sent yields much higher. Last Friday, Wall Street ended sharply lower as U.S. industrial labour action weighed on auto shares. Rising Treasury yields also pressured Amazon and other megacap growth companies. Cash Treasuries were not traded in Asia with Tokyo shut. Treasury yields edged higher on Friday, with the two-year above the 5% threshold.

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In the currency markets, the U.S. dollar was still standing strong near its six-month top at 105.25 against a basket of major currencies. The euro gained 0.1% to $1.0667, after slumping to a 3-1/2 month low of $1.0632 last week as the European Central Bank signalled its rate hikes could be over. The price of gold was 0.2% higher at $1,928.13 per ounce.

BRITISH POUND

Reuters: The pound rose against the dollar on Friday morning before selling off into the close to end the day down 0.22%. Sterling has been one of the best performing currencies this year, up 2.8% against the dollar since the start of January. But it has fallen since mid-July as the UK labour market has weakened and the dollar has rebounded on the back of a relatively strong U.S. economy.

Jane Foley, head of FX strategy at lender Rabobank, said the pound’s failure to rise against a weakening euro was a sign that the “market is skeptical about the UK economy”. The euro has dropped more than 5% against the dollar since mid-July as the euro zone economy has slowed. Against the pound, it’s been effectively flat over the same period. “With inflation higher or stickier, there is still the expectation that the Bank of England will have to do more and raise interest rates,” Foley said. “But there’s also the threat that the BoE will have to drive the UK economy into a recession. With those kind of questions the market is still reluctant to buy sterling over the euro.”

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The Bank of England will set interest rates next week and pricing in derivatives markets shows traders think it highly likely that policymakers will increase borrowing costs by 25 basis points to 5.5%. On Thursday the European Central Bank raised interest rates to 4% but said it was likely finished tightening monetary policy. The U.S. Federal Reserve sets interest rates on Wednesday. Inflation in Britain stood at 6.8% in July, compared with 5.3% in the euro zone. British inflation figures for August are due on Wednesday, a day before the BoE sets rates.

Last Friday, a BoE survey showed that the UK public’s predictions for inflation remained broadly stable in August at 3.6%.

U.S. DOLLAR

Reuters: The U.S. dollar was lower on Friday, after data showing a dip in consumer sentiment, but the greenback was still poised for a ninth straight week of gains, while the yen weakened to a 10-month low. The University of Michigan’s preliminary reading of its Consumer Sentiment Index dropped to 67.7 this month from a final reading of 69.5 in August and below the forecast of 69.1 among economists polled by Reuters. However, consumers saw inflation lower on both a one-year and five-year basis.

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Earlier data from the Labor Department showed import prices increased 0.5% last month as fuel prices jumped, but underlying price pressures stayed subdued while a separate report from the New York Fed showed factory activity picked up in the state in September. “None of the data currently points to a recession. Nevertheless, the fed futures still points to the end of next year, a lower rate,” said Joseph Trevisani, senior analyst at FXStreet.com. “If the credit markets are still convinced that when you increase rates as much as the Fed has, you eventually get a recession … where do people go? They go to the dollar.”

The Federal Reserve will hold a policy meeting next week on Sept. 19-20 and the central bank is largely viewed as keeping interest rates unchanged, with a 97% expectation for no action, according to CME’s FedWatch Tool. After edging higher earlier in the week, expectations for a 25 basis-point hike at the November meeting have declined to 30.6% from 43.6% a week ago, with a small chance of a cut being priced in as early as January.

The U.S. dollar index was down 0.08% at 105.32 , but was still poised for its ninth straight weekly gain, which would mark its longest weekly run since a 12-week streak of gains in 2014. The greenback continued to strengthen against the yen , after the Japanese currency had a sharp move higher versus the dollar earlier in the week. The dollar was last up 0.25% at 147.84 yen after hitting a 10-month high of 147.96. The euro was up 0.2% at $1.0666 , having recovered slightly from Thursday’s six-month low of $1.0629 following the European Central Bank’s (ECB) policy announcement, in which the central bank raised rates to a record-high 4% but signaled it was likely done with hikes.

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However, ECB policymakers pushed back on the idea the central bank was done with rate hikes, saying rates will be kept high for an extended period and could even be raised again if needed. The euro was on track for a ninth straight weekly fall against the dollar. Sterling , declined 0.2% at $1.2386. Along with the Fed, the Bank of England will also make a policy announcement this week.

SOUTH AFRICAN RAND

Investec: The USD-ZAR starts the new week off hovering around the 19-handle after a slight rand advance last week. The market was unable to sustain a rise on Friday despite US Treasury yields remaining elevated. Volatility is expected to be heightened through the week ahead as investors digest major central bank policy updates, especially if any shocks are realised.

More broadly, however, the ZAR remains vulnerable amid renewed concerns over SA’s fiscal situation, although, technically, it is looking somewhat oversold at current levels. This points to some potential for further consolidation withing a broad range, as has been the case since the early-August break of 18.5000.

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Published by the Mercury Team on 18 September 2023