Markets remain range-bound ahead of Fed decision
Tokyo — Oil prices cooled on Wednesday as Saudi Arabia said full oil production would be restored by the end of September while caution ahead of an expected US interest rate cut kept wider financial markets in tight ranges.
MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.13 % while Japan’s Nikkei was flat.
Wall Street shares ticked up a tad on Tuesday with the S&P 500 gaining 0.26%.
Brent crude futures dipped 0.1% to $64.50 a barrel, having conceded more than 60% of their gains made after the weekend attack on Saudi oil facilities.
US West Texas Intermediate (WTI) crude lost 0.5% to $59.06 a barrel, compared to a four-month peak of $68.38 marked on Monday.
Saudi energy minister Prince Abdulaziz bin Salman on Tuesday sought to reassure markets, saying the kingdom would restore its lost oil production by month-end, having recovered supplies to customers to the levels they were prior to weekend attacks.
“I would think a spike in oil prices will likely prove to be short-term given that the global economy isn’t doing too well,” said Akira Takei, bond fund manager at Asset Management One.
Still, heightened geopolitical tensions underpinned oil as well as some safe-haven assets such as US bonds.
A US official told Reuters on Tuesday the US believes the attacks originated in southwestern Iran, an assessment that could further increase the rivalry between Tehran and Riyadh.
Adding to uncertainties in the Middle East were exit polls from Israel’s election, which showed the race too close to call, suggesting Prime Minister Benjamin Netanyahu’s fight for political survival could drag on.
Gold was mostly flat at $1,502.10, while the 10-year US Treasuries yield fell to 1.810%, compared with Friday’s one-and-a-half-month high of 1.908% ahead of the Fed’s policy announcement on Wednesday.
While a 25-basis-point rate cut is seen as near-certain, investors look to the statement and economic projections from Fed policy makers, given signs of deep disagreements among them.
“Markets are currently almost pricing in three more rate hikes by the end of next year, including one by the end of this year, but the chances are that the Fed’s stance will be more hawkish than markets and we could see rise in bond yields in the near term,” said Masahiko Loo, portfolio manager at Alliance Bernstein.
The ongoing US-China trade war has raised policymakers’ concerns about slowing factory output, though resilient domestic consumption has given hawks some reasons to worry about cutting rates too hastily.
Possibly further complicating their discussion, short-term US interest rates shot up this week, with overnight repo rates rising to 7%, due largely to seasonal factors such as huge payments for taxes and bond supply.
That prompted the New York Fed to conduct its first repo operation in more than a decade to inject funds to stressed money markets.
The New York Federal Reserve said late on Tuesday it will conduct a repurchase agreement operation early on Wednesday “in order to help maintain the federal funds rate within the target range of” 2.00% to 2.25%.
Jeffrey Gundlach, CEO of DoubleLine Capital, said on Tuesday the repo market squeeze makes it more likely the Federal Reserve will resume expansion of its balance sheet “pretty soon”.
Also in focus is the Bank of Japan’s (BOJ’s) policy meeting due on Thursday. While the latest Reuters poll suggests the BOJ will keep its policy on hold, 28 of 41 economists expect it will ease its policy in 2019 and 13 believe it may surprise by taking action.
In the currency market, the euro stood flat at $1.1066 after a 0.6% gain the previous day on better-than-expected readings in Germany’s ZEW survey on investor confidence.
Sterling traded at $1.2489, down 0.05% so far on the day, having hit a two-month high of $1.2528 as investors reversed their bets against the currency on fear of a no-deal Brexit at the end of October.
The yen eased slightly to ¥108.26, near the one-and-a-half-month low of 108.37 touched on Tuesday.