Asian shares were mostly lower on Wednesday while the dollar dithered as markets waited anxiously for the Federal Reserve to provide guidance on the risk of U.S. rate hikes this year.
Spreadbetters expected the cautious mood to extend into Europe, forecasting a flat to modestly higher open for Britain’s FTSE .FTSE, Germany’s DAX .GDAXI and France’s CAC .FCHI.
While no move is expected at this meeting it does include updates of Fed members’ economic projections and a news conference with Chair Janet Yellen, events that have caused violent market reactions in the past.
“There’s no question that the FOMC is expected to provide the much-needed clarity global markets need in order to move forward with some sense of conviction,” said Stefan Worrall, director of Japan equity sales at Credit Suisse.
“Ahead of that, we’re seeing a very pregnant pause and an air pocket of conviction.”
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged down 0.3 percent, and Japan’s Nikkei .N225 took a knock from a firmer yen and slipped 0.7 percent.
Hong Kong’s Hang Seng .HSI lost 0.5 percent. South Korean stocks .KS11 were effectively flat while Shanghai .SSEC crawled up 0.1 percent.
Oil prices did manage a bounce after data from industry group American Petroleum Institute (API) showed U.S. crude stockpiles rose by less than half what analysts expected.
U.S. crude CLc1 gained 49 cents to $36.33 a barrel, while Brent LCOc1 rose 40 cents to $39.14. [O/R]
There was little movement on Wall Street where the Dow .DJI ended up 0.13 percent, while the S&P 500 .SPX lost 0.18 percent and the Nasdaq .IXIC dropped 0.45 percent.
JOIN THE DOTS
Hurting sentiment were downward revisions to retail sales that left consumer spending looking a lot softer so far this year. One result was that the Atlanta Fed “GDPNow” measure of economic growth dropped to 1.9 percent for the first quarter, from 2.2 percent.
The disappointing data only heightened the stakes for the Federal Open Market Committee (FOMC) meeting.
Analysts generally assume Fed projections for interest rates – widely known as the “dots” – will indicate only three hikes are likely this year instead of four. Yet the market is pricing in just one move of 25 basis points for 2016.
“It may seem dovish but the dots will have to come down by more than this, especially the 2016 dot, to be seen as genuinely bullish,” said Alan Ruskin, global head of forex research at Deutsche.
“The market has less tightening priced in for the end of 2018 than the December FOMC median dot for the end of 2016.”
This leaves equity and bond markets vulnerable to any hint of hawkishness from the Fed, say if Yellen made it clear that hikes were still possible at the April and June meetings.
In contrast, the U.S. dollar would likely benefit from the chance of higher rates.
It could do with the help having recently touched a one-month low of 95.938 against a basket of major currencies late last week. The dollar index .DXY stood little changed at 96.731 on Wednesday, while the euro marked time at $1.1100 EUR=.
Both the greenback and euro nursed losses on the yen, which tends to gain at times of risk aversion. The dollar fetched 113.42 yen JPY=, while the euro bought 125.92 yen EURJPY=R following a fall of 0.5 percent on Tuesday.