Minutes keep markets drifting

Markets show muted response to FOMC minutes

The FOMC minutes passed without incident overnight. The committee felt that risks were balanced but that the economy remained far from the FOMC’s longer-term goals. Additionally, they expressed comfort that the recent rise in US bond yields reflected an improving economy and economic outlook. Once again, they emphasised that labour markets remain far from pre-Covid levels and seemingly, this forms the centre of FOMC thoughts and rightly so.

The nil-all draw from the FOMC minutes left stock markets drifting, although, in currency markets, the US dollar firmed as US long yields edged higher. Notably, the Australian and New Zealand dollars were amongst the worst performers, emphasising the currency markets (and probably stocks) are being bounced around by fast money flows.

US Initial Jobless Claims should drop below 700,000 this evening, but most of the attention will be on Federal Reserve Chairman Jerome Powell, who is making a speech at midnight SGT. As ever, markets will be hanging off every word Mr Powell utters, searching for signs of a change in Fed guidance since March’s FOMC meeting.

With the US economic risks weighted to the upside as their recovery gathers momentum, a slip of the tongue, deliberate or not, will likely see bonds and equities punished and the US dollar rally. Even more so as it is clear that despite equity market gains this week, financial markets, in general, are being dominated by schizophrenic fast-money flows looking for the next big thing as they chase their tails.

The European Central Bank releases their last policy meeting minutes this evening, although markets are well conditioned to some members’ perpetual inflation fears. They are not nearly as flammable as the FOMC minutes, however, and no fireworks should ensue. Overnight, German, French and Italian Services PMI’s for March all surprised to the upside. Covid-19 may hurt those numbers in April, but the readings overnight were enough to allow the euro to cling to its gains versus the US dollar.

Sterling was pummelled overnight after both European and British medical agencies highlighted blood-clot risks from the AstraZeneca Covid-19 vaccine. Spain banned persons under 60 years old from receiving it, but it was the British recommendation that alternative vaccines should be used, if possible, for those under 30 years old that did the damage. That unwound some of the UK’s recent vaccine premium with GBP/USD falling 90 points to 1.3740 overnight on fears that the UK’s recovery would be delayed. British equities will probably feel the heat this afternoon as well.

Yesterday, the Reserve Bank of India left interest rates unchanged, but announced its formal intention to buy INR 1 trillion (USD13.50 bio) of government securities over the next quarter to cap borrowing costs. Although not called quantitative easing, yield curve control or debt monetisation by the RBI, it certainly resembled them, and the markets treated it as such. Equities rallied, but the Indian rupee tumbled 1.30% to 74.450 versus the dollar.

With Covid-19 cases soaring, threatening new national lockdowns and the trajectory of its already weak recovery, Indian asset markets may find themselves in the naughty corner in the weeks ahead. At least India’s vaccination efforts are also ramping up impressively, and unlike Brazil, it is the largest vaccine manufacturer in the world and is led by competent leaders. India’s travails are unlikely to spark a deeper rout in emerging markets, a task usually allocated to the US bond market.

The Asian data calendar today is nondescript, dominated by second-tier data. Japan’s trade balance rose slightly above expectations, in line with the region’s continued strength in export-facing sectors. The Philippine’s trade balance deteriorated, and Industrial Production plunged YoY as the country struggles to get to grips with its Covid-19 situation. The Philippine peso came under pressure yesterday but quickly reversed course, hinting that the central bank may have been around “smoothing.”

Both Japan and the Philippines will continue to be dominated by Covid-19, with Japanese authorities apparently assessing whether to widen movement restriction outside Tokyo. Otherwise, all remains quiet on the Eastern front. Asia is likely to content itself by adopting a wait-and-see stance today, awaiting directional inputs from North American markets.

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