"So far the major banks that have reported have largely
helped to settle market nerves," said Khoon Goh, head of Asia
research at ANZ in Singapore. "With those stresses easing away,
markets are now back to focusing on the Fed."
A slew of Federal Reserve speakers are in the frame over the
rest of this week ahead of the pre-meeting blackout period that
begins on the weekend.
The Fed's "beige book" of economic conditions is published
on Wednesday and appearances are due from Chicago Fed President
Austan Goolsbee and New York Fed President John Williams.
Markets are pricing an 86% chance the Fed raises rates by 25
basis points at the May meeting, and are winding back
expectations of cuts later in the year -- moves that have put
the brakes on U.S. dollar selling.
Still, the inversion between three-month Treasury yields and 10-year yields , at more than 160 bps,
is the deepest since 1981 when the Fed funds rate was climbing
down from peak of 19% - suggesting markets expect rates to fall.
Ten-year yields were last at 3.5813%.
SURFACE CALM The lack of big picture drivers in the Asia session left traders to look at earnings and ahead to economic data. Dutch-listed chip equipment maker ASML beat first-quarter profit expectations, according to Refinitiv data. British and European inflation figures are due later in the day with currency markets delicately poised. The winding back of rate cut expectations for the U.S. has given a floor to the dollar, but pressure on central banks in Britain and Europe to carry on hiking for some time has their currencies grinding higher. Sterling hit a 10-month high of $1.2545 last week and bounced with strong wages data on Tuesday. It was last at $1.2420. The euro hit a one-year high above $1.10 last week and lurked at $1.0969 in Asia trade on Wednesday. "Lower rate volatility and reduced expectations for Fed rate hikes should put the broad U.S. dollar in a weaker position," HSBC analysts said in a currency outlook note. "If anything, there could be a continued focus on short-end U.S. Treasury yields being lower than the Fed's policy rate and how this was a precursor to it easing in the past."
Elsewhere, Brent crude futures were steady at $84.52 a barrel, roughly where they have traded for a few weeks since OPEC+ announced surprise production cuts. Gold held above $2,000 an ounce and bitcoin above $30,000.
Citi strategist Matt King warned that the markets' calm may
be shortlived as central banks' efforts to soothe worries about
systemic bank risks start to wear off.
"Consensus holds that strong year-to-date risk performance
stems from the genuine improvements in the economic outlook," he
said.
"But a better explanation is the injection of over $1
trillion in central bank liquidity. This held down real yields,
propped up equity multiples, and tightened credit spreads in the
face of falling earnings expectations. High-frequency liquidity
indicators suggest this is already stalling."
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(Editing by Jacqueline Wong)
