Stock rally loses steam as markets wait for Fed

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Asia’s stock markets edged up to a fresh three-month high on Wednesday, with the dollar again under pressure but sentiment was largely cautious ahead of the U.S. Federal Reserve’s next move.

The inch higher in equities follows two weeks of strong gains, turbocharged by Friday’s data showing a completely unexpected rise in U.S. employment last month. Support for safe haves from gold to the yen, though, pointed to growing caution.

European stock futures fought for headway, with FTSE futures up 0.4% and EuroSTOXX 50 futures up by half a percent. U.S. stock futures rose 0.6%.

MSCI’s broadest index of Asia-Pacific shares outside Japan, which has galloped 9% higher in June and is 35% above March lows, rose 0.5%. Japan’s Nikkei rose 0.3%.

“The Fed tonight is a key variable in determining whether this is a pit-stop or U-turn,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

No action is expected, but any hint of taking the foot off the pedal could hammer risk sentiment and lift the dollar, while more dovishness could have the opposite effect.

Focus is on the Fed’s economic outlook and whether a steepening of the U.S. yield curve during last week’s bond market selloff might prompt intervention at longer tenors.

“Markets continue to expect a lot from the Fed because the Fed has continued to deliver tremendous amounts of support in the form of liquidity,” said Jason Brady, chief executive officer at fund manager Thornburg Investment Management.

“Over the last decade or so, every time, the Fed has tried to resist the markets, by suggesting that they’ll be less accommodative, they’ve ultimately ended up caving,” he said, adding he expects some form of yield curve control.

Benchmark stock indexes in Australia, Hong Kong and South Korea more or less idled. U.S. 10-year yields held at 0.8271%, 13.2 basis points below a Friday peak of 0.9590%.

Currency markets turned more optimistic late in Asian trade, with the risk-sensitive Australian and New Zealand dollars heading for another attempt on major resistance levels.

The Aussie last sat at $0.6995, about 0.7% below an 11-month high of $0.7043 hit a day earlier, while the kiwi rose 0.6% to $0.6549. The yen hit a week-high at 107.53 per dollar, reflecting caution.

Gold was firm at $1,716.90 per ounce.

Oil prices were on the back foot on renewed concerns about oversupply and underlying economic weakness. Brent crude was last down 1% for the session at $40.67 per barrel and U.S crude was 1.6% weaker at $38.30 a barrel.

Stock rally loses steam as markets wait for Fed, Reuters, Jun 10

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