Asia morning update

Yields rose across the board on the news, with the US 10-year yield back above the 1.50% territory. The Nasdaq fell at a lesser extent than the Dow overnight but one to watch if the trend can continue, largely dependent on whether yields are able to stabilise ahead. Further increase in yields may weigh on growth stocks.

The Fed may have delivered a more hawkish message for markets than many would have expected, with Fed officials leaning towards two rate increases by the end of 2023 based on median estimates. This comes with a significant upward revision in core PCE inflation forecasts, which suggests that inflationary pressures may remain for now and the timeline for easing remain largely uncertain, although the Fed is maintaining its stance of ‘transitory’ inflation.

Disparity in 2023 outlook for interest rates

The disparity in the 2023 outlook for interest rates among Fed members suggests that much will still depend on how the economic recovery will play out. With the Fed’s focus on unemployment, one to also watch for the actual unemployment figures ahead to guide future timeline for tapering.

That said, the markets have been hinted on tapering discussions and while markets start adjusting to expectations for a reduction in policy support ahead, risk-off sentiments may linger at a time where markets have a strong run-up since the start of the year and have been riding on Fed’s ‘lower-for-longer’ accommodative stance.

While near-term weakness is seen, one may note that the S&P500 can continue to climb with historical increases in Fed funds rate. Although there may be a near-term retracement when the Fed starts tapering, as seen from 2018-2019 market movement, markets may adjust their expectations over the longer term.

Asia Open

Asia stocks look set for a weak start, with Nikkei -0.93%, ASX -0.54% and KOSPI -0.70% at the time of writing. The risk-off sentiments follow through with the performance of US indices overnight as investors start to look towards an earlier timeline for rate hike and taper discussions in the picture. This comes as markets have been riding on Fed’s ‘lower-for-longer’ accommodative stance, with the recent Fed meeting outcome seemingly overturning this narrative.

The Singapore Index has broken below its key support level of 3,145 after a period of consolidation, as its 100-day MA fails to hold. Next support level may be at 3,068 as sentiments were weighed down by a more hawkish Fed and concerns over increases in local cases from virus clusters. The index movement seems to overturn a previous uptrend, potentially suggesting more downside to come.

On the watchlist: US dollar seeking to reverse previous downtrend

With the more hawkish tilt in the Fed’s dot plot, the US dollar has broken out of its previous consolidation zone, jumping to its six-week high. While the accommodative policy stance may remain for the near term, the change in tone in bringing up taper discussions has changed the landscape for the US dollar, which is seeking to reverse its downtrend formed since March this year.

With more and more talks on tapering to come over the next few months in the likes of Jackson Hole and FOMC meeting in July and September, this may potentially drive some bullish sentiments for the US dollar. Near-term resistance may be at the 91.50 level, if the level is breached, we may see the greenback moving to test the 92.38 level next.

Wednesday: S&P 500 -0.54%; DJIA -0.77%; Nasdaq -0.24%; DAX -0.12%; FTSE +0.17%