The week that may set the tone for financial markets into the end of the year is off to a relatively slow start, though not surprising given the event risk to come in the latter half of the week. Global equities are cautiously optimistic Beijing will be forced to respond to the recent dour economic data that has been littering the newswires, of which Sunday’s failed to buck the trend with fixed asset investment and industrial output both missing expectations for the month of August. Fixed asset investment saw growth slide to only 10.9% on a year-over-year basis, down from the 11.2% registered in July and the 11.1% that had been expected, ratcheting up rhetoric the People’s Bank of China will have to adjust monetary policy by either loosening up bank’s reserve requirement ratios or by reducing the overnight lending rate further in order to underpin the struggling economy. The Shanghai Composite wasn’t enthralled with the weekend’s data set, opening in the green before crumbling to a loss of close to 3% by the time trading finished.
Japanese equities shared in the pain experienced in China, with the Nikkei slipping by close to 2% ahead of tonight’s monetary policy decision by the Bank of Japan. The recent commentary from the central bank and its lack of worry in regards to price pressure suggests there is a strong probability policy will remain the same at tonight’s meeting, yet there is an outside chance the BoJ caves to the deteriorating economic data and introduces new stimulus measures to help combat sluggish inflation. The Japanese yen is stronger against the big dollar this morning, which aided in the softness witnessed in domestic equities, though we’re likely to see USDJPY held to relatively tight ranges ahead of the tonight’s decision from the BoJ.
Outside of the yen’s strength, currency markets are essentially range bound heading into Thursday’s FOMC interest rate decision, and not surprising given the magnitude of the decision at hand. The challenge for corporate hedgers heading into September’s rate decision is not simply whether the Fed will act or not, but also what the decision means for the longer-term trajectory of the greenback. Market sentiment is effectively pegging Thursday’s decision close to a 50/50 split, with surveyed economists slightly more optimistic the Fed will be conducting its first rate hike this week, yet interest rate futures are forecasting a lower probability. Instead of focusing on the binary outcome of the meeting decision itself, the resulting market action will likely be interesting as a gauge of market sentiment on the big dollar moving forward. Inaction from the Fed on Thursday may very well be accompanied by a relatively hawkish message from Ms. Yellen that a rate hike this year is still the most likely scenario, and a message that would ultimately underpin the dollar after what could be a knee-jerk sell-off. On the other hand, should the Fed decide to begin liftoff, the accompanying message may be hold a dovish slant, reminding market participants monetary policy still remains quite accommodative and that slope of the interest rate trajectory will be modest. While the international environment has complicated the domestic picture for the Fed and will make Thursday’s decision much too murky to call, it will give rise to good opportunities for corporate hedgers to take advantage of the associated volatility.
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