By Han Tan, Market Analyst at FXTM
Asian stocks and US equity futures are mixed as investors brace for imminent cross currents on Wednesday, including the latest FOMC policy outlook, US President Biden’s spending plans and more Big Tech earnings releases.
Amid the slew of headline-grabbing events slated for Wednesday, markets are also contending with rising Treasury yields, with those on the US 10-year breaking above the psychological 1.60% level to hit the highest levels in two weeks.
However, the VIX has pushed deeper into the sub-20 region which suggests an expected calm in equities over the coming 30 days despite the potential volatility triggers lined up for today.
Tuesday’s positive after-hours reaction to Alphabet’s blockbuster earnings report and its $50 bln share buyback announcement suggests some support for benchmark US indexes. However, that could be offset by the post-market declines in Microsoft’s stock prices, despite its own better-than-expected Q1 results.
Fed unlikely to rock the boat
The FOMC is widely expected to leave its policy settings unchanged at Wednesday’s meeting, with Chair Powell likely to stick to the script and pledge the Federal Reserve’s commitment to an ultra-accommodative stance.
Yet markets are ready to pounce on even the slightest hint of policy normalisation amid an economic recovery that is gaining more and more traction. As long as the Fed leaves policy settings the way they are at present, US stocks are still more likely to climb to fresh peaks.
The onus is on the Fed to clearly convey its intentions for QE tapering and rate hikes or risk whipsawing markets into a frenzy.
While such commentary is most probably still some way out, that isn’t stopping investors from already framing their expectations for such eventualities for US monetary policy, especially if the hard data continues to show the US taking bigger strides forward into the post-pandemic era.
Thursday’s release of the US Q1 GDP and the weekly jobless claims print could support the optimistic outlook for the US economy, while also feeding into the market’s expectations for the Fed’s eventual policy adjustments.
Tax hike fears loom over Biden’s speech
When US President Joe Biden addresses Congress for the first time as POTUS on Wednesday, investors won’t just be considering the implications of his “American Families Plan” on the US economy, but also on how such spending plans are to be funded.
Since last week, investors have been mulling the prospects of a capital gains tax hike alongside the already-proposed corporate tax increase, which could have a dampening effect on bullish sentiment surrounding US equities moving forward.
While the S&P 500 and the Dow are still likelier to post fresh record highs over the near-term, the tech-heavy Nasdaq could be particularly weighed down considering that Big Tech appears to be a prime target when the tax man comes calling.
Oil climbs after OPEC+ signals healthy demand
Both Brent and WTI futures are adding to Tuesday’s gains after OPEC+ decided to press on with restoring more of their supplies over the next three months. The alliance appears confident that global supply-demand conditions can absorb the additional barrels, despite the persistently disconcerting developments surrounding the Covid-19 pandemic in major economies such as India and Brazil.
However, $70 a barrel for Brent may still be one step too far for the time being, barring surer signs that more major economies can earnestly partake in the global demand recovery.
The continued rollout of the vaccine, coupled with the eventual loosening of Covid-19 curbing measures, are needed to justify a gradual rise in oil production. Markets must also continue believing that the recovery remains on track in order to keep Brent prices above its 50-day moving average.
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