Asia ready for Fed hike, anxious on rate outlook

Asian shares crept cautiously higher on Wednesday while a hush settled on the US dollar as investors felt certain the Federal Reserve would raise rates for the first time in a year, but were less sure what it might herald for 2017.

Australia led the early going with gains of 0.7 per cent and MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.2 per cent.

Japan’s Nikkei went the other way, easing 0.1per cent with moves across the region modest at best.

The outcome of the Fed’s policy meeting will be announced at 1900 GMT, followed by Chair Janet Yellen’s news conference half-an-hour later.

A quarter point move is fully priced in, as are two more hikes next year. Any hint the Fed may move faster than that would likely send the dollar higher and hurt emerging markets.

All eyes are thus on the Fed’s economic and rate “dot” plots for a sense of how policymakers think President-elect Donald Trump’s policies will impact growth and inflation.

“As most FOMC participants are likely to wait for more specifics on Trump’s fiscal policy initiatives before formally altering their forecasts, markets may be disappointed by the lack of additional insight provided,” said Michelle Girard, chief US economist at RBSM.

“We expect most participants will continue to see two to three rate hikes as appropriate in 2017.”

Treasuries have already moved to price in a rate hike and more, with two-year yields reaching ground last trod in April2010 at 1.18 per cent.

In contrast, the European Central Bank had only last week extended its asset buying campaign and moved to purchase more short-term debt.

A rich spread

As a result, the spread between US and German two-year yields is now the widest since late 2005, with Treasuries offering a mouth-watering premium of 191 basis points.

The gap kept the euro on the defensive at $1.0625, not far from the recent 20-month trough at $1.0505. The dollar was likewise steady on the yen at 115.24 and against a basket of currencies at 101.060.

Speculation that a Trump Administration will implement more debt-financed fiscal stimulus and cut regulation helped all three major US stock indexes to records this week. The Dow ended fewer than 100 points from the magical 20,000 mark.

Bank of America Merrill Lynch’s latest survey of investors found expectations of global growth at 19-month highs and inflation at the second highest percentage in 12 years.

Fund managers were the most optimistic about corporate profits in more than six years and allocations to bank stocks surged to an all-time peak.

The Dow ended Tuesday up 0.58 per cent, while the S&P 500 gained 0.65 per cent and the Nasdaq 0.95 per cent. Tech stocks joined the party as Apple climbed 1.7 per cent and Amazon 1.9 per cent.

Bulk commodities from iron ore to coal have also benefited from the reflation trade, combined with signs of stronger growth in China. Again, any hint the Fed might step up the pace of tightening could undo some of those gains.

Oil ran into profit-taking following a reported rise in US crude inventories and an estimate that OPEC may have produced more crude in November than previously thought.

US crude futures, which hit a high of $53.41 on Tuesday, were down 73 cents at $52.25 a barrel. Brent crude was quoted down 65 cents at $55.07.