Wednesday March 15: Five things the markets are talking about

Volatility is rising this week, with the VIX stateside jumping the most in four-weeks yesterday.

In Europe, elections remain a wild card for investors. Today’s vote in the Netherlands will deliver a reading on the state of “populism” in the region as races in France and Germany begin to heat up.

In the U.S, investors have the Fed Rate decision and economic projections to contend with (2pm EDT). The 100% implied probability means that, similar to Draghi’s press conference last week, the tone of chair Yellen’s press conference and forward guidance will decide if today decisions are a snooze fest or whether the ‘mighty’ USD and bond yields pivot away to higher or lower levels.

Down-under, there is the Aussie jobs report and the Bank of Japan (BoJ) rate announcement to open the Australasian sessions.

1. Global stocks mark time, wait for Fed decision

After a strong start to the week, Asian share prices consolidated in the overnight session, preferring to seek guidance from today’s Fed rate announcement.

In Japan, the Nikkei share average (-0.2%) was dragged down by a firmer yen (¥114.60) along with the broader Topix (-0.2%).

In Hong Kong with investors also focusing on today’s Fed dot-plot, the Hang Sang was on the back foot, retreating -0.2%. Sector performance were mixed, with energy shares leading the decline as lower oil prices dragged down the sector, while property stocks continued to outperform.

In China, stocks were roughly flat, with investors awaiting cues for direction as they closely monitored Premier Li Keqiang’s press conference at the end of China’s annual parliamentary meeting.

In Europe, equity indices are trading higher as Market participants await results of today’s Dutch election as well as the Fed’s policy decision. Banking stocks are leading the gains on the Eurostoxx, while energy, commodity and mining stocks are trading higher on the FTSE 100.

U.S stocks are set to open in the black (+0.2%).

Indices: Stoxx50 +0.4% at 3,411, FTSE +0.3% at 7,378, DAX +0.1% at 12,004, CAC-40 +0.2% at 4,985, IBEX-35 +0.7% at 9,970, FTSE MIB +0.7% at 19,667, SMI +0.2% at 8,680, S&P 500 Futures +0.2%

2. Oil prices jump after surprise U.S. stock draw, gold higher

Oil prices have rebounded from yesterday’s three-month lows after U.S industry data last night showed a surprise drawdown in crude stockpiles.

Ahead of the U.S open, Brent futures are up +71c, or +1.4%, at +$51.63, after settling down -43c at +$50.92 on Tuesday, their lowest close since November. U.S. West Texas Intermediate crude is trading up +81c, or +1.7%, at +$48.53 a barrel – the contract fell for a seventh consecutive session yesterday, its longest losing streak in 14- months.

API data yesterday revealed that U.S. crude stocks fell by -531k barrels last week. Market expectations were looking for an increase of +3.7m barrels. If the drawdown is confirmed today by the DoE it would be the first after nine consecutive builds.

Oil started the week under pressure after OPEC reported a rise in global crude stocks and a surprise output jump from its biggest member, Saudi Arabia.

Note: OPEC’s monthly report indicated that oil stocks in industrialized nations rose in January to +278m barrels above the five-year average, with U.S. shale and other non-OPEC supply gaining.

Gold prices (+0.4% to +$1,203.31 per ounce) have edged up this morning on safe-haven buying due to uncertainty over the outcome of today’s Dutch elections.

Also, the market is waiting for clues on the pace of U.S interest rate hikes this year. With an immediate rate increase by the Fed as a done deal, the market is focusing on what message the Fed chair Yellen will deliver.

Note: In December, the Fed forecast three-rate rises this year.

3. Fed Hike 100% priced in

The argument for a +25bps hike by the Fed was bolstered yesterday, by a stronger-than-expected U.S PPI headline print (+0.3% vs. +0.1% m/m). Fed funds have priced in +100% probability for a hike today. Expect the market to be focusing on any hints of a change in the number of increases the Fed foresees this year in its dot-plot survey (in December the consensus was for three-rate hikes).

Ahead of the open, the yield on U.S 10’s fell -1bps to +2.59%, after slipping -3bps on Tuesday. The equivalent Aussie rate was little changed at +2.92%.

This evening, the Bank of Japan (BoJ) is expected to keep its rates and yield-curve policy unchanged in its policy decision. On Thursday, the Bank of England (BoE), Swiss National Bank and Bank Indonesia are also expected to stand pat with their own policy decisions.

4. Dollar consolidates ahead of FOMC

It’s not a surprise to see the mighty dollar lose some traction ahead of today’s expected Fed rate hike.

The pound (£1.2193) has trimmed some of its overnight gains after data showed U.K wage inflation slowed sharply (see below). The pair had managed to move off yesterday’s seven-week low to print a one-week high earlier this morning (£1.2231). EUR/GBP trades at €0.8711, compared with around €0.8698 beforehand, still leaving the pound around +0.2% firmer on the day.

The EUR is slightly higher outright in quiet trade (€1.0630), while USD/JPY is steady in the mid-¥114 neighborhood.

5. U.K unemployment rate hits four decade low

Data this morning revealed that U.K unemployment rate fell to a forty-year low in the three-months through January, while wage growth after inflation slowed sharply. This may suggest that U.K citizens maybe facing a living standard squeeze despite the robust labor market.

Unemployment in the November-January period fell by -0.1% to +4.7% – employment rose by +92k. The market was expecting no change.

Note: Rising inflation is beginning eat into “real” wage growth, a sign that consumers may rein in spending, potentially causing the economy to slow in the months ahead. Adjusted for inflation, regular wages grew by only +0.8% in the three-months through January, the slowest pace of growth in three-years.

This morning’s data should dissuade the BoE from adjusting policy any time soon. Fixed income dealers expect no change to the BoE’s benchmark rate tomorrow, currently at +0.25%.