Markets Brace after a More Hawkish Fed Hike, AUD May Extend Drop

2018-12-20 00:00:00

Daniel Dubrovsky, Contributing Senior Strategist

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Asia Pacific Market Open – Fed, US Dollar, S&P 500, New Zealand Dollar, Japanese Yen, Nikkei 225
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Asia Pacific Market Open – Fed, US Dollar, S&P 500, New Zealand Dollar, Japanese Yen, Nikkei 225

More hawkish Fed than what markets were anticipating shocked investors as the S&P 500 tumbled
US Dollar rallied, but Euro & Yen stood their ground. New Zealand Dollar added to losses on GDP
Asia Pacific markets bracing as risk aversion may linger, AUD could extend decline on jobs report

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Over the past couple of months, the markets became doubtful of more monetary policy tightening to come from the US amidst global growth fears, trade wars and yield curve inversion. The S&P 500 lost about 13.4% of its value since then. Heading into the December Fed rate decision, investors have become skeptical of even one hike in 2019.

Today, the central bank cleared things up. Not only did it raise rates by 25 basis points as anticipated, but policymakers collectively envisioned two hikes in 2019. While this is technically one less than previously seen, this is still well above market expectations. The tone from Fed Chair Jerome Powell afterwards did highlight their patient stance going forward, relying more on the results of economic data to come.

The US Dollar surged on the announcement, rising against most of its major counterparts. Meanwhile the S&P 500 extended its decline, closing at its lowest in 15 months as support held at 2,490 as anticipated. Interestingly, local government bond prices rose with stocks falling, indicating a flight to safety given the shock to those anticipating a more dovish central bank.

One major that stood its ground against the greenback, albeit after losing most of its gains, was the Euro. This is because earlier in the day, the European currency rallied on reports that Italy and the EU had reached a budget agreement. Amidst the significant declines on Wall Street, the anti-risk Japanese Yen also pulled ahead against the greenback as carry trades were unwound and traders sought to preserve capital.

Meanwhile the pro-risk Australian and New Zealand Dollars tumbled. The latter was particularly battered by a softer domestic growth report heading into the beginning of Thursday’s session. New Zealand’s third quarter GDP not only missed expectations, but also weakened to its slowest pace since the fourth quarter of 2013 which is almost a 5-year low. (See the economic calendar below for the full details).

With that in mind, Asia Pacific benchmark stock indexes are bracing for Thursday’s trading session. Prospects of tighter monetary policy to come from the US in 2019 will likely send indexes such as the Nikkei 225 gapping lower as risk aversion engulfs financial markets. Needless to say, the Japanese Yen will likely get a boost in this scenario as AUD and NZD accelerate their losses.

We do also have a couple of notable event risks. The first is November’s Australian jobs report. Data has been tending to underperform relative to economists’ expectations, opening the door to a downside surprise. RBA rate cut bets have been slowly starting to gain traction and such an outcome can add fuel to dovish monetary policy expectations, sending the Australian Dollar lower to support against its major counterparts.

Then at an unspecified time during the session, the BoJ rate decision will cross the wires. However, few speculators will be anticipating major changes there. The Yen will probably be focusing on risk trends instead.