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Markets cautious ahead of Fed, Russia-Ukraine tensions

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By Lukman Otunuga, Senior Research Analyst at FXTM

Asian stocks flashed red Tuesday morning, alongside U.S futures after an explosively volatile session on Wall Street.

Equity markets were flung on a chaotic rollercoaster ride as investors grappled with Fed hike fears and mounting geopolitical tensions over Ukraine. In the currency space, king dollar edged higher despite the slight retreat in Treasury yields, while gold glittered amid the risk aversion.

European markets are catching up on the strong US close, but the caution in Asia has cast a cloud over sentiment as investors would prefer to shrug off the intense volatility that rattled markets on Monday.

Although Wall Street swung back toward positive territory by the end of the day, as investors exploited the selloff to snatch discounted shares, US equity bulls are not out of the woods. Should inflation concerns, Fed hike fears, and geopolitical tensions fuel risk aversion in the days ahead, this could spell trouble for risk assets around the world.

Overnight, Australia’s inflation jumped to 3.5% in the fourth quarter of 2021 amid rising petrol and housing costs.

The Australian dollar pushed higher during early trading as expectations rose over the RBA adopting a more hawkish tone at its next monetary policy meeting on February 1. Traders are currently pricing in a 58% chance of a rate hike by May, with June fully discounted.

Spotlight on Fed meeting

Although monetary policy is widely expected to remain unchanged, the FOMC meeting could provide some key insight into how aggressive the Fed intends to tighten policy throughout 2022.

Markets expect the U.S. central bank to signal on Wednesday that it plans to hike interest rates in March, with a total of four 25 basis point interest rate increases expected by the end of this year.

While the Federal Reserve may stick to the script, any hesitancy on future rate increases or a more dovish tone could breathe life back into riskier assets. Alternatively, a hawkish Fed may deal another blow to stock markets, injecting equity bears with fresh confidence.

Big week for Gold

Gold kicked off the week on a firm note as geopolitical tensions accelerated the flight to safety.

The slight retreat in Treasury yields also helped zero-yielding gold, as prices ventured towards the $1845 resistance level. There is no doubt that this will be a big week for gold with its near-term outlook likely to be influenced by the Fed meeting.

A hawkish Fed that signals multiple rate hikes could dampen the appetite for gold, resulting in prices sinking back towards $1831 and $1810.

If the Fed surprises markets by deviating from the script and shows hesitancy in future rate hikes, this may push the precious metal higher towards $1870.

 

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