Global equity markets exhibited cautious gains on Wednesday, poised for a key policy announcement from the Federal Reserve later in the day. Simultaneously, the Japanese yen hovered near one-year lows against the U.S. dollar, as Tokyo heightened its warnings of potential intervention.
European Markets Show Resilience
Europe’s benchmark STOXX index displayed resilience, advancing by 0.46%. This performance stood in contrast to the 0.1% uptick in MSCI’s broadest index of Asia-Pacific shares outside Japan, which has grappled with three consecutive months of losses.
In Japan, the Nikkei surged by 2% as investors remained vigilant for possible yen-buying intervention by authorities. This intervention would aim to lift the Japanese currency from its recent downtrend, despite earlier efforts by the central bank to reverse its losses.
Federal Reserve Policy Decision in Focus
The spotlight on Wednesday is firmly fixed on the Federal Reserve’s impending policy decision. Market expectations are leaning toward the central bank maintaining current interest rates.
Market participants will closely scrutinize comments from Federal Reserve Chair Jerome Powell to ascertain the future trajectory of interest rates and the anticipated duration of their elevated levels.
Erik Weisman, Chief Economist and Portfolio Manager at MFS Investment Management, conveyed that the Federal Reserve is likely to keep future rate hikes on the table until labor market conditions significantly cool and inflationary pressures ease. Weisman also anticipated Chairman Powell emphasizing the lagged effects of past rate hikes and advocating for prudence.
According to the CME FedWatch tool, the market is currently pricing in a 29% chance of a 25 basis point rate hike in December and a 35% chance of a similar hike in January.
U.S. Futures Signal Mixed Start
U.S. stock futures on Wednesday hinted at a potentially rocky start, with S&P e-mini futures, NASDAQ futures, and DOW futures all down by approximately 0.21%.
Meanwhile, Treasury yields continued to show strength, with the 10-year Treasury note yield increasing by 4 basis points to 4.914%. The 30-year Treasury bond yield rose by 5.3 basis points to 5.077%. The two-year U.S. Treasury yield, which often mirrors interest rate expectations, was up by 0.8 basis points at 5.079%.
Claudio Irigoyen, Global Head of Economics at BofA Global Research, highlighted the paramount question in the discussion of U.S. fiscal policy over the next three to five years: whether interest rates will revert to pre-pandemic levels or if a new era of higher real interest rates is emerging. Irigoyen expressed a preference for the latter scenario.
Yen Intervention Concerns in Asia
In Asia, market focus gravitated towards the Japanese yen following the Bank of Japan’s recent adjustment to its bond yield control policy. This policy shift further loosened its grip on long-term interest rates.
The yen experienced a significant decline on Tuesday, reaching a one-year low against the U.S. dollar and a 15-year low against the euro. Investors had anticipated more aggressive steps from the Bank of Japan to phase out years of extensive monetary stimulus.
Chris Weston, Head of Research at Pepperstone, characterized the market’s response to the policy adjustment as a clear dovish development. Market participants, frustrated by the lack of urgency shown by the Bank of Japan, either closed their yen long positions or shifted to outright yen shorts.
The sharp depreciation of the yen prompted a stern warning from Japan’s top currency diplomat, Masato Kanda. He cautioned that authorities were prepared to respond to the recent “one-sided, sharp” movements in the currency.
While the yen strengthened by 0.24% to 151.31 per dollar following Kanda’s comments, it remained near one-year lows at 151.74, a level it touched on Tuesday. Additionally, it hovered close to the three-decade low of 151.94 reached last year, which had prompted intervention by Tokyo at that time.
Against a basket of currencies, the U.S. dollar saw a 0.12% increase to 106.79. Sterling was last trading at $1.2151, marking a 0.2% decline for the day.
Asia’s Manufacturing Faces Challenges
Data released on Wednesday revealed increasing challenges for Asia’s manufacturers in October, as factory activity in China slipped back into decline. This development clouds the recovery prospects for major exporters in the region, who are already contending with weaker global demand and rising prices.