Marching on the spot

Equity markets are drifting lower in Asia today following a non-descript session overnight in New York, with most asset classes contenting themselves to march on the spot ahead of the FOMC meeting, which concludes this evening. The semi-conductor squeeze has taken the wind out of bullish sentiment today, as Honda announced production halts in North America. Samsung hinted at product delays due to a lack of chips.

Yet again, mainland China markets are having a tough day as the authorities widen their big-tech crackdown to include Tencent. US Secretary of State Blinken said from Tokyo that China should not use coercion and aggression to get its way. The comments suggest that relations between the two superpowers remain as troubled as ever and does not bode well for the meeting tomorrow and Friday between senior officials of both countries. That state of affairs is adding to the glum mood on the China mainland.

Various legendary names of the investing space have come out with wildly divergent views on bond yields, inflation and their impact on bond markets and other asset classes in the past 24 hours. Such big names being so far apart, reflecting the underlying confusion in financial markets as a whole regarding the same.

I suspect that bond vigilantes hoping for the Fed to blink on the dot plot and yield curve control front are going to be disappointed. A procession of Fed governors from the Chairman down have maintained a consistent lower for longer mantra over the past weeks. Additionally, they have expressed comfort with steeper yield curves and higher inflation, the latter being a result of an economic recovery, not a wage/price spiral. Notably, they have beat the drums consistently about employment being far from target and total employment remaining massively below pre-covid levels.

All eyes on FOMC meeting

If the Fed does not blink tonight, the markets will probably shift their expectations to the June meeting and send US bond yields higher anyway. That may lead to renewed pain in the tech space in the US and elsewhere and see the US dollar move higher once again as the 2020 short squeeze continues. Both the greenback and gold have stubbornly refused to retreat in recent sessions, even after yields edged lower and investors returned to the FOMO-ness of the Nasdaq.

Assuming the FOMC plays the game, the Bank of England and Bank of Japan should make the monetary policy decisions tomorrow and Friday, non-events, with no change expected. It will also create a sigh of relief for emerging market central banks with decisions over the next couple of days, like Indonesia. A Fed bond blink would be most keenly felt in emerging markets, notably those with dirty pegs (i.e. all of Asia) and large amounts of foreign-denominated debt and/or weak current accounts.

Of course, markets may seize on a steady Fed to flock back to the buy-everything trade at the expense of the US dollar, a risk I fully acknowledge. That inflation genie was bottled on Friday, only to re-emerge on Monday. I suspect its reluctance to be put away will be even shorter this time.

More European Union members suspended the use of the AstraZeneca Covid-19 vaccine overnight over blood clot fears. That has weighed on European asset markets and the single currency, and with wave three appearing in some member nations, Europe and the curo will continue to underperform. Notably, the United Kingdom has not made such a move, probably because they have already vaccinated the at-risk groups in question, such has been the programme’s pace.

The AstraZeneca saga and the third waves of infection will be another negative to add to the EU vaccination programme’s debacle as a whole. I expect UK assets markets to outperform EU ones for much of 2021. Nor will the EU’s vaccine nationalism be quickly forgotten by other trading partners.

The European Union taking an already tough job and making it a slow-moving, bureaucratic mess is a well-known quantity. Investors will vote with their feet. Elsewhere though, financial markets look happy to march on the spot everywhere, as we await the silence of the Fed, or not.

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