- Asian stocks lower amid fears of contagion, stagflation, and US-China tensions.
- US earnings provide relief from macro worries.
- Pound little changed ahead of UK budget announcement.
- Euro, yen to reflect cues out of dovish ECB and BOJ.
Most Asian markets are in the red as concerns persist over contagion risks stemming from the Evergrande saga, a potentially souring global economic outlook, as well as the return of US-China tensions. This downbeat mix is contributing to a cloud of caution over Asian assets, with the MSCI Asia Pacific index being left far behind US benchmark indexes so far this year.
At the time of writing, European markets have opened lower although US futures are in the green, with the Nasdaq looking to join the S&P 500 and the Dow at fresh all-time highs. The ongoing US earnings season has proven to be quite a positive distraction from the ‘wall of worry that dominated market sentiment in the previous weeks.
It remains to be seen whether these risk-on mood inequities can persist once the Fed announces its tapering plans and the spotlight shines back on its rate hike trajectory. Should market chatter return to the prospects of a major policy misstep that ramps up stagflation risks, that could undo a fair amount of the recent gains seen in risk assets.
Sunak’s spending to sway sterling?
GBP/USD has been sandwiched between its 50-day and 200-day simple moving averages for over a week, with markets now doubting a November rate hike by the Bank of England. Expectations for a rate move next week have been reduced over the past week from over 80% to now 57%, although a December hike remains fully priced in.
The catalyst for cable’s immediate move may come via Chancellor of the Exchequer Rishi Sunak’s Autumn budget later today. A surprise loosening of the fiscal spending taps that fan’s inflationary pressures could restore expectations for a faster rate hike path for the BOE. In turn, sterling bulls might see the 200-day SMA resistance at 1.3848 as the next area of interest.
ECB and BOJ: Battle of the doves
EUR/USD is hanging on to the 1.16 psychological level for the time being. The world’s most popular currency pair remains mired in the downtrend that began in the early summer months, due in part to the dovish policymakers on the continent.
The ECB is not expected to make any policy adjustments at this week’s meeting, while ECB President Christine Lagarde is likely to reiterate her dovish bias about policy patience and transitory inflation. Barring any hawkish surprise out of the ECB on Thursday, the euro is expected to continue underperforming its G10 peers until policymakers get closer to changing their collective tune.
The Japanese yen is the worst-performing G10 currency against the greenback on a year-to-date basis and it doesn’t seem like it will be relinquishing that title anytime soon. With Japan showing green shoots of a return to inflation, a sustained ramp-up in price pressures in the world’s third-largest economy should help the Bank of Japan catch up with its G10 peers in the quest for policy normalization. Hence, the BOJ’s inflation outlook should hold the key for the yen’s near-term performance, even as policy settings remain untouched this week amid expected upward revisions to 2022’s GDP and inflation forecasts.
