By Lukman Otunuga, Senior Research Analyst at FXTM
Asian stocks were in the red on Tuesday as continuing geopolitical risks and surging Covid-19 cases in China dealt another blow to risk appetite.
In the currency space, the dollar got off to a shaky start despite the rise in Treasury yields, while gold extended losses, sinking closer to $1900.
Also falling are WTI oil prices which fell below $100 a barrel as China imposed lockdowns in key cities.
European futures are pointing to a negative trade as hopes fade over a ceasefire in Ukraine, with risk-off sentiment potentially trickling back to Wall Street which ended mostly lower on Monday.
A sense of caution continues to shroud financial markets due to ongoing geopolitical tensions, rising Covid-19 cases in China, inflation fears, and looming U.S monetary policy tightening.
Earlier Tuesday, data from China exceeded market expectations but this failed to shake off the jitters and overall gloom. This could be the theme this week as the current themes overshadow economic data.
With investors likely to maintain a defensive stance towards riskier assets ahead of the Federal Reserve meeting on Wednesday, equity markets could be in store for further punishment.
The S&P500 remains under pressure and has shed over 4.5% this month. A solid daily close below 4150 could signal further downside, especially if risk-off remains the name of the game.
All eyes on Fed meeting
The main risk event this week will be the Federal Reserve monetary policy decision on Wednesday. Markets widely expect the central bank to raise interest rates by 25-basis points as Fed Chair Jerome Powell recently signaled. It would be the first hike by since 2018.
Given how the conflict in Ukraine has left investors fearful over the global growth outlook, the policy path beyond March may be clouded by the fog of war.
Much attention will be directed towards the economic projections (“dot plot”) and press conference for fresh clarity on future rate hikes.
With US inflation hitting a new 40-year high at 7.9% in February, the Fed remains entangled in a fierce battle against rising prices. It will be interesting to hear Powell’s thoughts on recent events and how the Fed plans to navigate through this storm.
The dollar may appreciate if the Fed adopts an aggressive approach towards higher interest rates despite ongoing geopolitical risks. Should the central bank strike a more cautious tone and economic forecasts are downgraded, this could result in dollar weakness.
Oil prices extend selloff
Oil benchmarks were under pressure Tuesday with WTI dipping below $100 as investors evaluated demand risks from China’s imposed lockdowns and the Ukraine-Russia ceasefire talks.
The commodity is likely to remain sensitive to geopolitical risks and supply-side factors, especially as Russia’s oil imports are banned further.
It may be wise to keep a close eye on the Energy Information Administration (EIA) report on Wednesday. Another weekly drawdown in crude inventories could limit downside losses for oil.
Commodity spotlight – Gold
Gold stumbled into Tuesday’s session under renewed pressure as Treasury yields rose ahead of an expected rate hike by the Fed.
While heightened geopolitical risks and overall uncertainty have recently accelerated the flight to safety, the prospect of the Federal Reserve raising interest rates could result in further losses.
Given how prices have dropped almost $70 since last Friday, the path of least resistance points south in the short term.
Ultimately, where gold concludes this week will be heavily influenced by the outcome of the Fed meeting, movements in bond markets, and ongoing geopolitical tensions.
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