On Wednesday, cautious trade weighed on stocks, while the dollar halted its recent slide as markets anticipated a peak in the Federal Reserve’s rate hike cycle sooner than U.S. banking sector worries.
The MSCI index of Asia shares outside Japan (.MIAPJ0000PUS) fell 0.4% to pull back from Monday’s two-month peak, and Japan’s Nikkei NI225 was on track to end an eight-day rally with a slight 0.3% drop.
S&P 500 futures ES1! slipped 0.2% and European FESX1! and FTSE Z1! futures were steady, ahead of inflation data from Britain and Europe and Tesla earnings figures due later in the day.
Morgan Stanley MS also reports, following solid earnings at rivals that seem to have eased market concerns about the sector’s stability.
“With those stresses fading away, markets are now back to focusing on the Fed,” said Khoon Goh, head of Asia research at ANZ in Singapore.
A number of Federal Reserve speakers are scheduled to speak over the rest of this week ahead of the pre-meeting blackout period that begins on the weekend.
The Fed’s “beige book” of economic conditions is published on Wednesday and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.
Markets are pricing an 86% chance the Fed raises rates by 25 basis points at the May meeting, and are scaling back expectations of cuts later in the year — moves that have put a stop to U.S. dollar selling.
However, the inversion between three-month Treasury yields (US3MT=RR) and 10-year yields US10Y , at more than 160 bps, is the deepest since 1981 when the Fed funds rate was coming down from peak of 19% – suggesting markets expect rates to fall.
In the absence of major drivers in the Asia session, traders focused on earnings and upcoming economic data.
ASML, a chip equipment maker listed in the Netherlands, exceeded first-quarter profit expectations, according to Refinitiv data. Inflation figures from Europe and Britain are due later in the day, with currency markets finely balanced.
The scaling back of rate cut expectations for the U.S. has supported the dollar, but the pressure on central banks in Europe and Britain to keep hiking for a while has their currencies edging higher.
GBPUSD reached a 10-month high of $1.2545 last week and rebounded with strong wages data on Tuesday. It was last at $1.2420. The euro
EURUSD hit a one-year high above $1.10 last week and hovered at $1.0969 in Asia trade on Wednesday.
“Lower rate volatility and reduced expectations for Fed rate hikes should put the broad U.S. dollar in a weaker position,” HSBC analysts said in a currency outlook note.
“If anything, there could be a continued focus on short-end U.S. Treasury yields being lower than the Fed’s policy rate and how this was a precursor to it easing in the past.”
Elsewhere, Brent crude B BRN1! futures were steady at $84.52 a barrel, roughly where they have traded for a few weeks since OPEC+ announced surprise production cuts. Gold GOLD held above $2,000 an ounce and bitcoin BTCUSD above $30,000.
Citi strategist Matt King cautioned that the markets’ calm may be shortlived as central banks’ efforts to calm worries about systemic bank risks start to wear off.
“Consensus holds that strong year-to-date risk performance stems from the genuine improvements in the economic outlook,” he said.
“But a better explanation is the injection of over $1 trillion in central bank liquidity. This held down real yields, propped up equity multiples, and tightened credit spreads in the face of falling earnings expectations. High-frequency liquidity indicators suggest this is already stalling.