Today: 14-04-2024

Market Watch: Anticipation Builds as Asian Stocks Await Fed Decision, with a Spotlight on the Fragile Yen

"Market Dynamics: Asian Stocks Inch Up Ahead of Fed Decision, Yen Vulnerability in the Spotlight"

SINGAPORE, Nov 1 (Reuters) — Asian stocks displayed a cautious upward trend on Wednesday, anticipating the Federal Reserve's much-anticipated policy decision later in the day. Meanwhile, the Japanese yen hovered near one-year lows against the dollar, facing increased vulnerability as Tokyo issued intervention warnings. MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) inched 0.14% higher, aiming to recover from three consecutive months of losses. Japan's Nikkei (.N225) surged 2%, signaling positive momentum. European stocks appeared poised for a steady opening, as Eurostoxx 50 futures rose by 0.34%, German DAX futures by 0.37%, and FTSE futures by 0.27%.

The focal point of the day revolves around the Federal Reserve's policy decision, with expectations leaning towards a steady interest rate. Eyes will be on Fed Chair Jerome Powell's comments for insights into future rate hikes and the duration of elevated rates. Erik Weisman, Chief Economist and Portfolio Manager at MFS Investment Management, noted the Fed's commitment to considering future rate hikes until labor market conditions ease and inflationary pressures abate. He emphasized Chairman Powell's likely stance on the lagged effects of past hikes and the importance of patience.

Market sentiment currently reflects a 29% probability of a 25 basis point hike in December and a 35% chance in January, according to the CME FedWatch tool. Treasury yields remained elevated, with the 10-year Treasury note up 4.5 basis points to 4.920%. The 30-year Treasury bond rose by 5.4 basis points to 5.078%, while the two-year U.S. Treasury yield, aligned with interest rate expectations, increased by 1.2 basis points to 5.083%.

Claudio Irigoyen, Global Head of Economics at BofA Global Research, emphasized the critical question surrounding U.S. fiscal policy—whether interest rates will revert to pre-pandemic levels or enter a new regime of higher real interest rates. Irigoyen indicated a leaning towards the latter.

In Asia, attention centered on the yen following the Bank of Japan's decision to adjust its bond yield control policy, relinquishing some control over long-term interest rates on Tuesday. The outcome emphasizes the nuanced dynamics influencing global markets as they await key decisions and signals from central banks."

"The recent adjustment to a more flexible regime by the Bank of Japan (BOJ) triggered a significant decline in the yen, reaching a one-year low against the dollar and a 15-year low against the euro. Investors, anticipating a more decisive move from the BOJ to end years of massive monetary stimulus, expressed frustration, leading to the closure of yen long positions or a shift to outright yen shorts. The yen's sharp drop prompted a stern warning from Japan's top currency diplomat, Masato Kanda, indicating authorities' readiness to respond to recent 'one-sided, sharp' currency movements.

Despite a 0.24% strengthening to 151.31 per dollar following Kanda's comments, the yen remained close to the one-year lows observed on Tuesday and the three-decade low from last year, which prompted intervention by Tokyo at that time. The dollar, against a basket of currencies, saw a 0.075% increase, reaching 106.75. Sterling was at $1.2135, down 0.16% on the day.

In the broader Asian market, China shares (.SSEC) experienced a 0.14% increase, while Hong Kong's Hang Seng Index (.HSI) eased by 0.09%. Economic data from Wednesday revealed a worsening outlook for Asia's manufacturers in October, with China's factory activity slipping back into decline. This adds to the challenges faced by major exporters in the region dealing with weakened global demand and higher prices.

Oil prices inched higher ahead of the Federal Reserve decision, with ongoing attention to developments in the Israel-Hamas conflict. U.S. crude rose by 0.07% to $81.08 per barrel, and Brent reached $85.20, up 0.21% on the day."

Reporting by Ankur Banerjee, additional reporting by Tom Westbrook, Editing by Shri Navaratnam and Miral Fahmy.

"In conclusion, the Bank of Japan's recent shift to a more flexible regime had pronounced effects on currency markets, particularly in the yen's decline to one-year lows against the dollar and 15-year lows against the euro. Investor frustration ensued, prompting closures of yen long positions or a shift to outright yen shorts. Japan's top currency diplomat, Masato Kanda, issued a stern warning, signaling authorities' preparedness to respond to sharp currency movements.

Despite a slight rebound to 151.31 per dollar following Kanda's comments, the yen lingered close to recent lows. The broader Asian market displayed mixed signals, with China shares slightly up and Hong Kong's Hang Seng Index easing. Economic data underscored challenges for Asia's manufacturers, especially with China's factory activity sliding back into decline.

As oil prices inched higher ahead of the Federal Reserve decision, the geopolitical backdrop, particularly developments in the Israel-Hamas conflict, remained a key point of focus. U.S. crude and Brent both saw modest increases.

The intricate dynamics in currency markets and broader economic indicators highlight the delicate balance faced by global markets. With the Federal Reserve decision looming, uncertainties persist, contributing to an environment where nuanced geopolitical events play a significant role in shaping market movements."

Reporting by Ankur Banerjee, with additional reporting by Tom Westbrook, edited by Shri Navaratnam and Miral Fahmy.