Markets on Fed watch, vaccine fallout in Europe

After a mixed session in Asia, Europe is seeing a mildly lower start, with most sitting on the sidelines ahead of the much-anticipated FOMC meeting later today.

Volumes are expected to be light across the session with few wanting to take aggressive bets ahead of what is shaping up to be one of the most eagerly awaited Fed meetings for a while.

This is the first FOMC meeting since inflation expectations really picked up, sending yields sharply higher. Fed Chair Powell finds himself in the unenviable position (not for the first time) of needing to walk a fine line between acknowledging the vaccine and stimulus-driven recovery without raising concerns of overheating and rate hikes.

Recent Fed chatter, particularly from Jerome Powell himself, has pointed to the Fed remaining accommodative. Growth and inflation forecasts are, however, expected to be revised higher. How the bond market reacts to those revisions and Jerome Powell’s tone is what will set the market’s direction for the coming weeks.

Vaccine concerns easing?

The vaccine situation in Europe could start to turn a corner soon after European regulators confirmed the AstraZeneca jab benefits outweigh any concerns over blood clots in a preliminary report. Several leaders have signalled they are ready to lift the suspensions, but the question is whether the people are ready to take it. Low take-up of the AstraZeneca vaccine is a very real and likely consequence of the scaremongering in Europe surrounding the inoculation. This could hit Europe’s already very sluggish vaccine programme. With France teetering on the brink of another lockdown, this latest vaccine scepticism could hit the French economy hard.

European bourses have been relatively unaffected by the vaccine scandal and have actually outperformed the FTSE so far this month (keeping in mind the UK’s rapid vaccine programme). Instead, concerns over the sluggish vaccine rollout in Europe are being reflected in the euro, which has significantly underperformed the pound across March.

FX – Fed to sink the euro?

FX markets are eerily quiet ahead of the highly-anticipated FOMC meeting, with major pairs all trading within a narrow range. After three days of gains, the US dollar is pausing for breath.

The euro is clinging to 1.19 after being hit by the AstraZeneca vaccine row in recent sessions. Eurozone inflation data was shrugged off. CPI rose 0.2% MoM in February, in line with forecasts and January’s print. On an annual basis, core inflation dropped to 1.1%, down from 1.4% but in line with forecasts.

The euro is looking vulnerable ahead of the FOMC. A touch too much optimism from the Fed could be sufficient to send it tanking lower towards 1.18.

Oil looks to EIA data & FOMC

Oil prices are drifting lower on Wednesday as investors await fresh catalysts. The API report revealed an unexpected draw in crude inventories of just over one million barrels compared to expectations of a 2.7 million barrel build. The better-than-forecast API data points to demand picking up faster than expected following last month’s cold snap.

Attention will now turn to EIA stockpile data due later today. Expectations are for a build of 2.7 million barrels, following an eye-watering 13.8 million increase in last week’s data. A large fall in stockpiles could boost oil prices.

Falling stockpiles could be limiting losses in both benchmarks, which trade mildly lower. However, moves in the US dollar following the FOMC could also dictate where oil goes from here. USD-denominated oil trades with a negative correlation to the greenback. With this in mind, a hawkish Fed could drag oil prices lower.

Gold’s fate lies with the Fed

Gold is just about holding onto its bullish edge ahead of the FOMC. After striking a nine-month low at the start of the month, the yellow metal has been clawing back some losses. Weaker-than-forecast US inflation data and an easing back of bond yields have helped the precious metal make cautious progress. However, gold’s recovery from here is very much in the hands of the Fed.

Any hint of Operation Twist, whereby the Fed looks to buy up longer-dated bonds, is likely to be gold positive. But this is a less likely scenario if recent Fed chat is to be believed. The Fed is more likely to adopt its tried-and-tested position of reiterating its accommodative stance and highlighting that the US economy is still some way from the Fed’s goals. As long as Jerome Powell doesn’t send yields shooting higher than today’s, the FOMC could be supportive of further upside for gold.