Wednesday, October 9, 2019

Global markets sink as trade war optimism fades; is the Fed in a dovish mood?

  • China
  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks

Market recap: US-China tensions escalate as visa restrictions placed on Chinese officials

US equities took a beating on Tuesday, as tensions continued to grow between the US and China. The US imposed visa restrictions on Chinese officials it believes are linked to the detention of Muslim minorities in China’s Xinjiang province. The news came one day after the US blacklisted eight Chinese tech firms for the same reason. The DJIA sank 1.19%, the S&P 500 tumbled 1.56% and the Nasdaq plummeted 1.67% after the announcement from the US Department of State.

Demand for safe haven assets gained as optimism for a trade deal between the US and China faded for the second day in a row. Gold rose by 0.80% and the Dollar Index continued to surge for a second session, rising 0.17%. The yen strengthened against the greenback, with USD/JPY decreasing 0.16% to close the day at 107.09. US Treasury yields fell across the board, with two-year yields suffering the most, dropping 4bps to 1.42%. 10-year yields fell 3bps to 1.53% and 30-year yields retreated to 1.03%.

The UK’s major index, the FTSE100, and GBP/USD fell 0.76% and 0.60% respectively, following claims a Brexit deal is now “essentially impossible”. The decline follows a phone call on Tuesday morning between British Prime Minister Boris Johnson and German Chancellor Angela Merkel.

Meanwhile in Asia, equity markets and major indices look set to track US losses on Wednesday. The Nikkei, Hang Seng and the Straits Times Index opened 0.81%, 0.60% and 0.38% lower respectively on Wednesday morning.
Today’s focus will be on the Federal Open Market Committee’s (FOMC) monetary policy meeting minutes, which are released at 10pm (GMT +4).


Today’s analysis: All eyes on FOMC’s September monetary policy meeting minutes

Fed Chairman Jerome Powell reiterated his preference for data-driven monetary policy decisions during the National Association for Bilingual Education (NABE) Conference on Tuesday, October 8th. Powell also signaled that while the US economy is strong, it may be expanding slower than expected. He backed up his views with recent employment data revisions from August, which amended average monthly job growth numbers for April 2018 to March 2019 from above 200,000 per month to 168,000 per month. Other recent economic data, including the Institute for Supply Management’s (ISM) Manufacturing Purchasing Manager’s Index (PMI), have also signaled a reduced momentum in economic growth.

Fed Fund Futures data suggests the market has now priced in an 83.9% probability of a 25bps rate cut by the end of October.

Chances of a Fed rate cut again after investors view Powell's speech as a dovish signal

Today’s FOMC’s September monetary policy meeting will hint at what FOMC members’ think about the US and global economy - and how divided they are with regards to monetary policy. The market expects the minutes to confirm what it already knows - the Fed is optimistic about the domestic economy, while monitoring global risks.

If FOMC members are optimistic about the economy and are open to another rate cut, expect to see Fed Fund Futures predicting one of 90% or even more. In that case, the greenback will likely weaken, possibly pushing the Dollar Index back to 98.72’s level.

We expect the minutes to reiterate Powell’s take on the economy, which is a strong domestic economy coupled with increasing uncertainty as a result of geopolitical risks. It will also more than likely reaffirm its data-driven approach and this leads us to believe that the dollar will weaken slightly, to 99.00’s level.

FOMC minutes will likely confirm market sentiment

As the next FOMC meeting is scheduled for October 29th and 30th, there are still important economic indicators yet to be released. The market will likely take this data into account before the release of the FOMC’s decision on monetary policy.

Important data releases to look out ahead of FOMC monetary policy meeting in October

Bears to retest 98.72 support level while bulls look forward to escalating trade tensions

Investors are mostly waiting on today’s release of the FOMC’s September monetary policy meeting. If the minutes show strong dovish signs from the Fed, the bears will likely win, pushing the Dollar Index below past 98.72. But it’s more likely that the minutes will only confirm market sentiment, and the greenback will continue to trend upwards, towards the initial resistance of 99.57 as demand for the dollar as a safe haven increases.