January 4, 2019 / 8:36 AM / 6 months ago

Daily Briefing: Ship steadies as markets look to Fed's Powell

LONDON (Reuters) - After another plunge on Wall St, Asia’s stock markets have managed to steady the ship as a scheduled resumption of Sino-U.S. trade talks for next week and positive signals from China’s service sector business surveys help stop the new year global markets rout.

Shanghai and HK stocks rallied 2 percent and Seoul’s Kospi was up almost 1 percent, with U.S. futures also back in the black after a 2.5 percent dive in the S&P500 overnight following the twin shocks from Apple’s revenue warning and news of the biggest drop in U.S. manufacturing activity last month since 2008.

Japan’s Nikkei dropped 2 percent in catch-up to the new year turbulence as Japanese markets returned for their first trading day of 2019.

"Chairman Powell needs to be careful that plain English doesn’t become the enemy of necessary nuance"

Part of the reason for the stabilisation is a scheduled speech from Federal Reserve chairman Powell later on Friday, shortly after the December U.S. employment report.

U.S. stock market anxiety sent 2-year U.S. Treasury yields dipped below the Fed’s policy rate for the first time since 2008 – an inversion of the short end of the U.S. yield curve that some fear is harbinger of recession over the next 12-18 months.

Futures markets are now pricing in a 40 percent chance of Fed rate cut this year and a cut is fully priced by May 2020. Ten-year Treasury yields fell as low as 2.5430 percent overnight – their lowest since January last year and drop of 70 basis points in just 6 weeks.

Although it recovered a touch against the yen after Wednesday night’s 'flash crash', the dollar was lower more broadly on the Fed speculation, with the DXY index down a touch and euro/dollar trying to get a foothold back above $1.14. Emerging market currency indices were also higher against the dollar.

The problem with such aggressive Fed easing speculation is that it will be hard for Powell to match that level of dovishness – given the Fed itself is still signalling 3 more rate hikes by the middle of next year. The risk for markets is that anything he says now will be hawkish compared to prevailing market expectations.

The U.S. payrolls report may well be positive twist, however, with consensus forecasts for a rise of 177,000 jobs last month. Above forecast private-sector ADP readings on Thursday point higher, although there are concerns that the U.S. government shutdown might affect the federal jobs tally.

European stocks are set to open up 1 percent, meantime, with eyes on euro zone flash inflation figures for December.

— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —

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