Central bank fever builds, saps risk appetite

Investors in Asia on Wednesday enter a crucial 24-hour period in a cautious mood, with stocks in the red and risk appetite subdued ahead of the Fed’s interest rate decision later in the day and the Bank of Japan’s closer call the following day.

Before these two blockbuster calls, the central banks of Thailand and Indonesia also deliver their latest policy decisions – both are expected to keep interest rates on hold at 2.25% and 6.00%, respectively.

The “risk off” tone for Asia on Wednesday was set by global market moves on Tuesday – world stocks and Wall Street posted chunky losses, the dollar held its ground, and the 10-year US Treasury yield hit a one-month high of 4.44% before easing back.

World stocks hit a two-week low on Tuesday, Wall Street’s big three indices lost between 0.3% and 0.6%, and the Dow clocked up its ninth consecutive daily loss. Remarkably, that is its longest losing streak since 1978.

Surprisingly strong US retail sales figures didn’t derail near-certain expectations of a quarter-point US rate cut on Wednesday. But it’s another solid top-tier economic indicator that will strengthen the perception of ‘US exceptionalism’ and a relatively hawkish Fed going into next year.

Indeed, assuming the Fed cuts rates by 25 basis points on Wednesday, another quarter-point move isn’t fully priced into rates futures markets until June. The 2025 curve barely implies 50 bps of easing all year.

This is helping support the dollar and Treasury yields, a sentiment-sapping combination at the best of times for emerging markets, never mind with so many central bank decisions on the immediate horizon.

Emerging markets will also be sensitive to the rising ‘term premium’ on 10-year US Treasuries – essentially the risk premium investors demand for lending long to Uncle Sam rather than rolling over shorter-term debt – which is close to making new highs for the year.

The dollar is holding up well generally but probably performing better against Asian and emerging currencies – the Brazilian real sank to a new low on Tuesday, India’s rupee touched another record low, while the Thai baht and Indonesian rupiah were also on the back foot ahead of their respective central bank decisions.

All this points to a fairly subdued day for risk assets in Asia Wednesday. In currencies, the yen is advancing across the board ahead of the BOJ decision on Thursday. Could Governor Kazuo Ueda and colleagues hike rates by 10 bps? Japanese swaps market pricing is split almost 50-50 on this right now.

Japanese stocks, meanwhile, are expected to open in the red but a burst of potential M&A activity could lift spirits after Nikkei reported that auto giants Nissan and Honda are to open merger talks.

Here are key developments that could provide more direction to markets on Wednesday:

– Thailand interest rate decision

– Indonesia interest rate decision

– US interest rate decision

(Reporting by Jamie McGeever)