The writing was on the wall for a downward session across Asian equities after the sell-off in US markets.
The disappointing Wall Street lead, combined with the upcoming risk event in the form of Chairman Powell’s speech at Jackson Hole was more than enough to put equities on the back foot to end the week.
All the major indices across the region were steeply in the red, with traders hesitant to take onboard new positions in case the Fed Chairman further dulls the market mood by signalling an extended period of elevated interest rates.
The ASX200, Nikkei, Hang Seng, and Kospi were all registering losses during the session.
I’m not convinced that we will necessarily hear anything groundbreaking from Jerome Powell at the central banker’s symposium, because the path that inflation will take from here is still anyone’s guess, including the FOMC. As such, further tightening will surely remain an option on the table should the direction of inflation take an undesirable turn.
Such messaging would be in line with what the most recent FOMC meeting minutes conveyed. It’s possible that Powell could highlight the reduced recessionary risks for the US economy which may be of some comfort to financial markets.
But if there are no hints of policy easing being on the horizon, the latest round of risk aversion we have seen could be exacerbated.
Certainly, the bond market is foreshadowing an extended high-interest rate environment, given the current lofty levels of treasury yields. If Powell’s tone prompts some further upside in US treasury yields this could spell bad news for equity markets.
So, the bond market will be worth watching as Powell’s remarks hit the airwaves, particularly with yields being on the cusp of some key technical levels.
The USD has been going from strength to strength courtesy of the yield outlook. The DXY has taken the 104 level, which could be a sign that markets are not expecting much in terms of dovish messaging from Jackson Hole.
Gold has shown some resilience despite the continued appreciation of the Dollar, which hints that the precious metal may have started to receive some safe-haven buying flows.
Ultimately, the direction of treasury yields in the short term will determine which side of the $1900 level gold resides at.
Oil is looking weary with the latest bout of market negativity sending the price lower. Macroeconomic gauges from around the globe this week have not been fantastic, and the oil price has reacted accordingly. WTI is easing toward the $79 level with the oil market not being helped by the latest leg higher in the greenback.
But now it all comes down to Jackson Hole, with markets remaining highly sensitive to monetary policy settings. If Powell’s interest rate outlook isn’t as pretty-looking as the Jackson Hole backdrop, risk aversion levels could ratchet up
Market commentary from Tim Waterer, chief market analyst at KCM Trade.