• The Fed Minutes were on the hawkish side
• US CPI and core CPI accelerated in March
• Gold surges on Syria jitters
• Oil markets tense on Middle East crisis
• Global markets on the edge

A touch of risk aversion crept into financial markets on Wednesday, as the sense of relief over easing U.S-China trade tensions was overshadowed by the rising geopolitical risk surrounding Syria.

US President Donald Trump is a master in escalating tensions with his tweets, no one can beat that. The financial markets are rocked again after Trump said in his usual morning tweet that “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and ‘smart!’ You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!” The tweet triggered concerns that if, intentionally or unintentionally, any US strike causes Russian casualties, there would be an escalatory cycle that worsens the situation in Syria further.

That missile tweet was sufficient to frighten the horses to some extent, dampening risk sentiment.

The Fed Minutes were on the hawkish side

It was stated that, “all participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months” and that “all participants expected inflation on a 12-month basis to move up in coming months”. Nonetheless, members noted that the actual path was still reliant on incoming data but continued to judge the risks as “roughly balanced”. It was noted that, “a number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected”.

The minutes of the 20-21 March FOMC meeting indicated participants were becoming more concerned about the stronger economy generating inflation pressures, particularly in light of the fiscal stimulus. There was discussion about the risks of overshooting the inflation target. The discussion reflects the fact that the FOMC dot plots were raised quite significantly at the meeting, with the median 2020 Fed funds projection was lifted to 3.4%. They also noted the Fed funds may have to be lifted above the longer run rate of 2.875%. The minutes discussed tariffs, and believed they were not likely to have a significant effect on the outlook, but retaliatory actions pose a downside risk to the economy.

Overnight ECB President Mario Draghi also indicated he did not see large economic impacts from the tariffs but noted they could affect confidence. He noted that while the direct effects of the tariff announcements or proposed were relatively modest, he will be watching to see what impact it has on confidence and the economy through that channel. He was quite upbeat on conditions in the Eurozone, bolstering an expectation that wages will eventually rise. This deflection played to the view that he’s in no rush to make any near term definite statements about what will happen after September when the current QE program ends.

US CPI and core CPI accelerated in March

US headline CPI dropped -0.1% mom in March, but annual rate accelerated to 2.4% yoy, up from 2.2% yoy. Core CPI rose 0.2% mom, 2.1% yoy, up from 1.8% yoy in February. The set of data should ease some inflation worries of Fed policymakers. But they are providing no support to USD.

Gold surges on Syria jitters

Investor sentiment turned negative on Wednesday, as the rhetoric between the US and Russia has ratcheted higher. This has sent gold prices sharply higher. Tensions in the Middle East are high, as Syrian forces allegedly used chemical weapons against rebel positions last week, and a UN Security Council meeting ended inconclusively after Russia cast a veto on a US proposal to probe the attack. US President Trump has warned that a US response is on the way, and Russia has countered that it will respond to any US move. If Trump makes good on his promise, investors could lose their risk appetite and the markets could spiral downwards.

Gold surges to as high as 1365.24 and attempted to break out from recent triangle consolidation. Immediate focus is now on 1366.05 high, which is not far away. Based on current momentum, break of 1366.05 should send gold to 61.8% projection which is close to 1400 handle. However, there are two resistance levels to overcome from a longer term point of view. Firstly, that’s 1375.15 which are 2016 high. Secondly the 38.2% retracement at 1380.56. As for now, this 1375/80 zone is the real test for gold ahead.

Oil markets tense on Middle East crisis

Brent hit 2014 highs of USD73.09 per barrel on Wednesday, after Saudi Arabia said it intercepted missiles over Riyadh and US President Donald Trump warned Russia of imminent military action in Syria. Oil markets remained tense on Thursday on concerns of a military escalation in Syria, but prices were some way off Wednesday's highs as bulging American supplies weighed.

US treasury prices were supported by safe haven demand due to rising geo-political tensions. US 2-year yields fell by 1 ppt to 2.307% and US 10-year yields fell by 2 ppts to 2.779%.

Major currencies were mixed against the USD in the US and European sessions compared with the Asian close. USD (DXY) fell 0.04% to 89.62 although March inflation met expectations in February and overshadowed FOMC minutes which revealed the policy makers are inclined for faster rate hikes and confident that both the growth and inflation would be firmer but remain cautious on the trade war which may pose a risk to their target. Meanwhile, signs of risk aversion emerged putting some drag on dollar after Trump declared a strike on Syria and warn Russia against backing Syria. The EUR fell from highs near 1.2392 to lows near 1.2347 and was near 1.2368 in late US trade. The Japanese yen strengthened from 107.09 yen per US dollar to 106.63 yen per US dollar and was near JPY106.81 in late US trade. The MYR softened 0.1% to 3.8745 against the USD. Although the KLCI inched 0.5% higher to 1,869.89, we saw net foreign funds recorded a net outflow of RM27.4m. We expect the ringgit to trade between 3.8580 and 3.8850 as we notice gradual pick up in the RSI levels.

Global markets on the edge

After a streak of gains, we expect Malaysian stocks could take a breather from the recent upside as we think the overnight weakness on many global indices will prompt profit taking activities on stocks that have posted strong gains over the past few sessions. As it is, the flaring up of tensions in the Middle East and the higher U.S interest rate issues are taking off some shine on global market sentiments and this could provide the excuse for investors to take some profit on their recent gains. Nevertheless, the broad market outlook has not turned overly negative as yet and as a consequence, the pullback is likely to be mild for now.

The wild movements witnessed across global equity markets in recent weeks continue to highlight how fragile market sentiment remains amid the ongoing U.S-China trade developments. Although conciliatory remarks from President Xi Jinping have soothed concerns over a global trade war, will this be enough to support equity bulls in the long term? Stock markets still remain vulnerable to downside losses, especially if escalating tensions in Syria prompt investors to scatter away from riskier assets to safe-haven investments. We do not think we are heading into the World War Three but should there be a direct collision between the US and Russia for the first time, that's the sort of headline that would plunge stock prices.

Source: BIMB Securities Research - 12 Apr 2018