Wednesday, January 26, 2022

Capital Markets: "Federal Reserve and Bank of Canada Meet as Risk Appetites Stabilize"

From Marc to Market:

Overview: After a slow and mixed start in Asia, where Australia and India are on holiday, equity markets have turned higher. Europe's Stoxx 600 is up around 1.9% near midday in Europe, which if sustained would be the biggest gain of the year. US futures are snapping backing too, with the S&P 500 popping more than 1% and NASDAQ by 2%. The equity recovery is having little impact in the bond market, where the US 10-year yield is up a basis point or so to near 1.79% and European yields are slightly firmer. The risk-on sentiment is evident throughout the foreign exchange market as the Swiss franc and yen are underperforming and the Norwegian krone, and dollar-bloc are leading the advance. Emerging market currencies are mixed. While the South African rand tops the performers, Russia and Eastern European currencies are sporting modest declines. The JP Morgan Emerging Market Currency Index is paring yesterday's gain. Meanwhile, gold's rally may be stalling around $1850, a two-month high. March WTI is firm and has held above $85 a barrel and is pushing through $86. US natural gas is up around 5% to extend its rally for a fourth consecutive session, while Europe's benchmark (Dutch) is snapping a four-day rally with a 3% pullback. Iron ore extended its gains to the best level since August, and copper is firm in the middle of its recent range. The main interest today is on the equity performance after the volatility and the Fed and Bank of Canada meetings.

Asia Pacific
The IMF downgraded this year's forecast for global growth to 4.4% from 4.9% projected in October.
The virus, higher inflation, and high debt levels were key considerations. The new constraints on mobility are expected to weigh on Q1 activity but recover in Q2. Still, a reassessment of the world's two largest economies is at the heart of it. The combination of more aggressive Fed tightening and failure to pass the large (~$2.2 trillion) hard and soft infrastructure measures led to a sharp cut in the IMF's US growth forecast to 4% from a little over 5%. China's zero-Covid policy and travel restrictions, prompt the IMF to reduce its projected growth by 0.8% to 4%. 

Beijing has continued to harass Taiwan by sending warplanes into its Air Identification Zone, with nearly 40 planes earlier this week, which is the most this year. Trying to make rhyme or reason for the continued action, some point to the two US carrier strike groups in exercises in the South China Sea. On another front, reports suggest Lithuania is considering asking Taiwan to change the name of its de facto embassy. It had planned to break tradition and allow Taiwan's name to appear, rather than the more customary Taipei. China reacted as one would expect....