The Nub

Asia’s stock markets were steady but fragile on Thursday, a day after their biggest drawdown in three months as investors weighed the risk of the Federal Reserve announcing a 100 basis point interest rate hike next week to tackle sticky inflation. The Japanese yen loitered just above recent lows, riding a boost from the strongest hints yet of possible market intervention by Japanese authorities. The New Zealand dollar jumped a bit on better-than-expected growth data. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4% and Japan’s Nikkei rose 0.3%.

Why Does it Matter

“Equity markets are presently in no-man’s land,” said Sean Darby, global equity strategist at Jefferies in Hong Kong. “Better macro news to support earnings is discounted as the need for further tightening to quash growth – while CPI prints are not declining fast enough,” he said. “The best metaphor is that the Fed is not only driving the economy using a rear view mirror but is now being forced to press the ‘rate rise’ accelerator just as bond markets are discounting an overtightening.” Fed funds futures, which were dumped along with stocks after Tuesday’s stubbornly hot US inflation reading, imply a 37% chance of a 100 basis point rate hike next week and have the benchmark US interest rate about 4.3% by February. 

What Next

“I certainly don’t want to be the one to stand here and suggest that this is the line in the sand,”  Shafali Sachdev, head of FX, fixed income and commodities for Asia at BNP Paribas Wealth Management in Singapore. “But what’s clear is that the market is wary of the level, and has tried to test the level a few times which seems to suggest that if it breaks, it may overshoot quite rapidly.” Thursday data showed Japan posted a record trade deficit in August – aggravated by the yen’s slide, but also yet another weight on the currency. Later in the day European trade data is due and Chinese President Xi Jinping meets Russia’s Vladimir Putin in Uzbekistan. Brent crude futures held at $94.04 a barrel.