Risk Appetite Will Remain Low After The FOMC. By Nicholas Hastings
The Federal Reserve needs to convince financial markets that the green shoots of recovery aren't withering.
But it won't.
Risk appetite will remain low and the dollar and the yen will continue to benefit at the expense of high-yielders after the Fed has completed its latest policy meeting later Wednesday.
The problem for the Fed is that the pessimism that has swept across the globe this week will not be budged by just words.
The market now needs further hard economic evidence of a global recovery as well as reassurance that the Fed is poised to unwind the quantitative easing that could feed inflation further down the road.
The gloom about the global economy which hit markets this week was striking. Stock markets suffered the sort of losses not seen for months. The price of crude oil and commodities in general tumbled sharply on the assumption that consumption isn't going to live up to expectations.
And these declines may well be justified. The expectation of a global recovery got well ahead of itself, with some markets even starting to anticipate an upturn in interest rates.
International forecasters, such as the World Bank, have succeeded in injecting some sense of reality, bringing markets down to earth with a bit of a bump.
Now, they will be looking to the Fed to fine-tune these expectations.
Certainly, the Fed will try to reassure markets that there is still cause for optimism. But the Fed will also need to stress that "the all-clear cannot be sounded just yet," said Steve Barrow, senior currency strategist with Standard Bank in London.
The Fed has another vital task: managing market expectations of its policy, a job that had become well nigh impossible since the introduction of quantitative easing.
On the one hand, the Fed needs to knock on the head any market expectations that it is in any hurry to bring its unconventional monetary policy measures to a close.
On the contrary, it will need to leave open the option for further action should it be necessary in a world that remains riddled with financial uncertainties.
At the same time, the Fed will need to provide some explanation of how it will exit quantitative easing in a way that won't stoke inflation pressures further down the road.
Even if the Fed succeeds in fulfilling this tall order, optimists could still find themselves outnumbered as the market still waits for hard evidence that those green sheets are still growing, either in economic data or in second-quarter earnings that are just around the corner.
As Geoffrey Yu, a senior currency strategist with UBS in London warned: "The second quarter earnings season is also approaching fast and any profit miss by a global growth-sensitive heavyweight could be the catalyst for further risk liquidation."
Early Wednesday in Europe, as market participants adjusted their positions ahead of the FOMC, the dollar remained under pressure against most other majors. It did manage to rise to Y95.28 by 0645 GMT from Y95.24 late Tuesday in New York, according to EBS. The yen was being undermined by trust fund purchases abroad.
Click Image to Enlarge
The euro rose to $1.4127 from $1.4081 and to Y134.97 from Y134.11 as a 0.4% rally in the Nikkei indicated a small improvement in risk appetite, helped by the 2.4% rise in U.S. existing home sales Tuesday.
Apart from the Federal Open Market Committee meeting results later in the day, currencies will also be affected by how much the European Central Bank manages to inject into the euro-zone economy through its first offering of unlimited one-year funds. The exercise could prove significant in terms of boosting bank funding.
But it won't.
Risk appetite will remain low and the dollar and the yen will continue to benefit at the expense of high-yielders after the Fed has completed its latest policy meeting later Wednesday.
The problem for the Fed is that the pessimism that has swept across the globe this week will not be budged by just words.
The market now needs further hard economic evidence of a global recovery as well as reassurance that the Fed is poised to unwind the quantitative easing that could feed inflation further down the road.
The gloom about the global economy which hit markets this week was striking. Stock markets suffered the sort of losses not seen for months. The price of crude oil and commodities in general tumbled sharply on the assumption that consumption isn't going to live up to expectations.
And these declines may well be justified. The expectation of a global recovery got well ahead of itself, with some markets even starting to anticipate an upturn in interest rates.
International forecasters, such as the World Bank, have succeeded in injecting some sense of reality, bringing markets down to earth with a bit of a bump.
Now, they will be looking to the Fed to fine-tune these expectations.
Certainly, the Fed will try to reassure markets that there is still cause for optimism. But the Fed will also need to stress that "the all-clear cannot be sounded just yet," said Steve Barrow, senior currency strategist with Standard Bank in London.
The Fed has another vital task: managing market expectations of its policy, a job that had become well nigh impossible since the introduction of quantitative easing.
On the one hand, the Fed needs to knock on the head any market expectations that it is in any hurry to bring its unconventional monetary policy measures to a close.
On the contrary, it will need to leave open the option for further action should it be necessary in a world that remains riddled with financial uncertainties.
At the same time, the Fed will need to provide some explanation of how it will exit quantitative easing in a way that won't stoke inflation pressures further down the road.
Even if the Fed succeeds in fulfilling this tall order, optimists could still find themselves outnumbered as the market still waits for hard evidence that those green sheets are still growing, either in economic data or in second-quarter earnings that are just around the corner.
As Geoffrey Yu, a senior currency strategist with UBS in London warned: "The second quarter earnings season is also approaching fast and any profit miss by a global growth-sensitive heavyweight could be the catalyst for further risk liquidation."
Early Wednesday in Europe, as market participants adjusted their positions ahead of the FOMC, the dollar remained under pressure against most other majors. It did manage to rise to Y95.28 by 0645 GMT from Y95.24 late Tuesday in New York, according to EBS. The yen was being undermined by trust fund purchases abroad.
Click Image to Enlarge
The euro rose to $1.4127 from $1.4081 and to Y134.97 from Y134.11 as a 0.4% rally in the Nikkei indicated a small improvement in risk appetite, helped by the 2.4% rise in U.S. existing home sales Tuesday.
Apart from the Federal Open Market Committee meeting results later in the day, currencies will also be affected by how much the European Central Bank manages to inject into the euro-zone economy through its first offering of unlimited one-year funds. The exercise could prove significant in terms of boosting bank funding.
- 24 June |
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