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TALKING POINTS – FED, POWELL, YEN, FRANC, STOCKS, AUSSIE DOLLAR

  • Yen, Franc rise as hawkish Fed outlook shift spooks financial markets
  • Rising borrowing costs may expose pockets of QE-linked malinvestment
  • Stock index futures hint risk-off mood to persist in European, US trade

The anti-risk Japanese Yen and Swiss Franc outperformed while commodity FX – the Australian, Canadian and New Zealand Dollars – followed shares lower as swelling Fed rate hike expectations soured sentiment in Asia Pacific trade. The 2019 tightening path implied in Fed Funds futures steeped by the most in three weeks to register at its most hawkish in almost three years.

Diminishing political risk in the Eurozone marked the move’s beginning after Italybacked away from a budget fight with regional authorities in Brussels, which traders seemed to interpret as giving the US central bank more leeway to step up stimulus withdrawal. Fed Chair Jerome Powell poured fuel on the fire, saying rates may need to rise above the “neutral” level.

The markets are probably worried that a swift rise in borrowing costs will put pressure on any pockets of malinvestment accumulated globally over a decade of ultra-cheap credit following the Great Recession. To the extent that this might trigger significant stress in emerging market assets, corporate debt markets, or as as-yet unknown corner of the financial system, market-wide liquidation is not a trivial threat.

STOCK FUTURES HINT MARKET SELLOFF LIKELY TO CONTINUE

From here, a lackluster offering of European and US economic data seems likely to keep broad-based sentiment trends at the forefront. Futures tracking European and US equity benchmark indexes are pointing sharply lower, suggesting the risk-off drive has scope to continue. Momentum may slow as the day progresses however as traders withhold conviction ahead of Friday’s much-anticipated US jobs report.

See our global equities forecast to learn what may drive a marketdownturn in the fourth quarter!

ASIA PACIFIC TRADING SESSION

Asia Pacific Economic Calendar

EUROPEAN TRADING SESSION

European Economic Calendar

** All times listed in GMT. See the full economic calendar here.

FX TRADING RESOURCES

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter