Asia resigned to Fed hike, uptight on rate outlook

EghtesadOnline: Asia shares crept cautiously higher on Wednesday while a hush settled on the U.S. 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.

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14 December 2016

European bourses were tipped to open a shade lower by spread betters, while E-mini futures for the S&P 500 were down a miniscule 0.02 percent, Reuters reported.

Australia led the going early with a gain of 0.8 percent, though MSCI's broadest index of Asia-Pacific shares outside Japan could only manage a 0.1 percent rise.

Japan's Nikkei and Shanghai stocks both dithered either side of flat, as did much of the region.

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 that the Fed may move more aggressively than that would likely send the dollar higher and jolt 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 U.S. economist at RBSM.

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

Treasuries have already priced in a rate hike and more, with two-year yields reaching ground last trod in April 2010 at 1.18 percent.

In contrast, the European Central Bank 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 U.S. 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 $1.0635, 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 101.000.

Speculation that a Trump Administration will implement more debt-financed fiscal stimulus and cut regulation helped all three major U.S. 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 percent, while the S&P 500 gained 0.65 percent and the Nasdaq 0.95 percent. Tech stocks joined the party as Apple climbed 1.7 percent and Amazon 1.9 percent.

However, confidence in Asia toward business conditions over the coming six months dropped in the final quarter of 2016 to its lowest level in a year as firms fretted about sluggish demand in a persistently low-growth economic environment, a Thomson Reuters/INSEAD survey found.

Asian companies are particularly reliant on demand from China, which is firmly in Trump's protectionist sights.

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 U.S. crude inventories and an estimate that OPEC may have produced more crude in November than previously thought.

U.S. crude futures, which hit a high of $53.41 on Tuesday, were down 70 cents at $52.28 a barrel. Brent crude eased 68 cents to $55.04.