● Fed minutes leave generally mild impact…
● …but pockets of emerging markets feel strain
● German 10-year yield closing in on 0.5 per cent with ECB minutes ahead
The minutes from the latest Federal Reserve meeting, released late yesterday, have made few major ripples in global markets, with the mix of short-term hawkishness and longer term caution leaving investors with little to work with.
“The market is going to struggle to read the tea leaves with this one,” said Luke Bartholomew, investment strategist at Aberdeen Asset Management. “The Fed is divided over the timing of the balance sheet run-down and why inflation is where it is.”
He added that the “working assumption” continues to be that September will see the start of balance sheet reduction, but that investors will hope from more clarity from Janet Yellen when she is due to speak to Congress next week.
Reading between the lines, the latest Fed minutes showed that the current status quo is unsustainable but all future paths it can take are fraught with pitfalls: in short, there are no good options ahead.
The dollar index rose slightly in Asian trading but weakened as European stocks opened, falling 0.03 per cent to 96.262. US government bonds dipped a little, with 10-year yields picking up by 0.014 percentage points to 2.337 per cent, below this month’s peak. (Yields rise when prices fall.)
In emerging markets, there were more flickers of action, with the Turkish lira extending recent losses. The dollar was up by nearly 0.6 per cent against the currency in early European trading, at TRY3.62.
Meanwhile, the German benchmark bond yield edged towards its highest level this year ahead of minutes from the European Central Bank, as markets awaited more clues on monetary policy.
The 10-year Bund yield rose 2 basis points to 0.493, flirting with 0.5 per cent – a round number perceived by chart-watchers as a key upper level to crack in order to prompt further gains.
The ECB minutes “will be closely examined for any subtle hints that the Governing Council are a step closer to taking their foot of the QE pedal”, according to Viraj Patel, foreign exchange strategist at ING.