- Asian stocks, US futures tepid after recent declines.
- Delta variant poses significant risk to market sentiment.
- FOMC minutes could offer more insight into Fed’s tapering thinking.
Risk appetite is attempting to claw its way back after Tuesday’s selloff. Asian stocks are pushing higher while European bourses have opened modestly in the green and US equity futures are little changed. The growing apprehension towards taking on more risk remains palpable across financial markets, which has allowed gold prices to defy the dollar’s surge on Tuesday and move within touching distance of the psychological $1800 mark.
Markets are becoming more guarded against the looming risks. From a potential flare-up in geopolitical tensions to the Delta variant’s persistent menace to the global economic recovery, the bar appears to have been raised for risk assets to climb significantly higher over the near-term.
To use the same adjectives employed by RBNZ Governor Adrian Orr earlier today, one only has to consider the “unpredictable and disruptive” nature of the Delta variant to know that the global economy is not yet on solid ground. With New Zealand now joining Australia in lockdown, along with China’s moderating economic recovery, such episodes are testament to how even the most optimistic outlook can be dampened by negative developments in this protracted battle with the virus.
As the global population learns to live with Covid-19, so too must market participants with such uncertainties.
Fed tapering plans remain a key focus
As dark clouds gather on the horizon, the main driver of global market sentiment remains the Fed’s tapering timeline. The July FOMC meeting minutes due later today might help investors have a firmer grasp of policymakers’ thinking ahead of what could be a key announcement, perhaps to be made at either next week’s Jackson Hole symposium or next month’s policy meeting.
The Fed’s policy bias will be heavily influenced by the incoming economic data which has proven to be a mixed bag since the last FOMC meeting. A blockbuster July nonfarm payrolls print was followed up with disappointing consumer sentiment and headline retail sales figures.
Ultimately, Fed officials have highlighted their desire for one or two more robust monthly job reports before becoming comfortable with an official decision to taper. That announcement could then give the all-clear for a sustained rebound in Treasury yields, which should support more upside for the greenback while forcing bullion to unwind recent gains.
The eventual moving away from the stimulus punch bowl also suggests a limited runway for risks assets to march higher, having already enjoyed tremendous gains since the onset of the pandemic. As witnessed in the kiwi dollar this week, so much optimism has already been baked into risk assets that there now seems to be greater propensity for them to drop at the slightest risk-off touch rather than to continue running higher unabated.
