(Bloomberg) — Stocks in Asia are set to rise after Wall Street traders sent US benchmarks to fresh all-time highs before the Federal Reserve decision.
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Futures for indexes in Tokyo, Hong Kong and Sydney all pointed to gains. US equities erased early losses on Tuesday after a rebound in the “Magnificent Seven” cohort of tech megacaps, amid bets Nvidia Corp.’s new chips will keep fueling its stellar rally. Bonds also gained, while the Bloomberg dollar index climbed for a fourth day.
Investors should buy the dip in stocks in the case of pullbacks amid a backdrop of good economic growth and inflation normalization, according to Goldman Sachs Group Inc. strategists led by Christian Mueller-Glissmann.
“While equity momentum has somewhat supported broader risk appetite, we see limited implications of a continued reversal barring a material US rate shock,” they said.
The S&P 500 closed just shy of 5,180. Treasuries pushed higher, with a $13 billion sale of 20-year bonds drawing strong demand. The yen slid as the Bank of Japan refrained from signaling any future hikes after scrapping the last negative interest rate regime. Oil rose a second day, while Bitcoin extended a retreat.
Wall Street is divided on whether the US stock market’s meteoric rise has gone too far, too fast. The latest Bank of America fund manager survey showed that investors were split on whether or not artificial intelligence stocks are in a bubble — with 40% saying “yes” and 45% answering “no.”
The Fed is expected to hold rates steady for a fifth consecutive meeting on Wednesday, and attention will shift to the central bank’s projections in the so-called dot plot.
The summary of economic projections will reveal whether still-robust data are giving officials cause to dial back intentions to cut rates — or if their outlook for three reductions this year remains on track.
“Whether the rise in yields and the dollar can continue comes crucially down to whether the Fed validates the hawkish narrative or not,” said Win Thin and Elias Haddad at Brown Brothers Harriman. “If Jerome Powell can stick to the hawkish script, the message will remain consistent and market reaction will likely be limited. If he veers from the script and delivers a dovish tilt, then market reaction will likely be quite violent.”
The Fed will also begin in-depth discussions about its balance sheet this week, including when and how to slow the pace at which the central bank drains excess cash from the financial system.
Since 2022, the Fed has been letting as much as $60 billion in Treasuries and as much as $35 billion in agency-backed mortgage debt mature each month and roll off its balance sheet, a process known as quantitative tightening.
“In our view, commentary around plans for the Fed’s balance sheet will be at least as important as remarks around the potential timing of rate cuts,” said Chris Senyek at Wolfe Research. “While we don’t expect an official QT tapering announcement until the May meeting, we’re hoping for color around the potential timing and pace of the wind down.”
The Fed has expressed a preference for eventual return to a Treasury-only portfolio — so the MBS runoff pace is expected to continue, though the central bank might be more flexible to extend the timeline, slowing QT, according to Naomi Fink at Nikko Asset Management.
“There’s also a bias toward coupon securities, which means the Fed over time has to increase its T-bill holdings relative to its coupon holdings, which all else equal, argues for waning support for the long-end of the curve,” Fink noted.
Key events this week:
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Eurozone consumer confidence, Wednesday
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Fed rate decision; Chair Jerome Powell holds news conference, Wednesday
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Reddit’s IPO, Wednesday
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ECB’s Christine Lagarde speaks, Wednesday
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Eurozone S&P Global Services PMI, S&P Global Manufacturing PMI, Thursday
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Bank of England rate decision, Thursday
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US Conference Board leading index, existing home sales, initial jobless claims, Thursday
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Nike, FedEx earnings, Thursday
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Japan CPI, Friday
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Germany IFO business climate, Friday
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Atlanta Fed President Raphael Bostic speaks, Friday
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ECB’s Robert Holzmann and Philip Lane speak, Friday
Some of the main moves in markets:
Stocks
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Hang Seng futures rose 0.5% as of 6:42 a.m. Tokyo time
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S&P/ASX 200 futures rose 0.3%
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Nikkei 225 futures rose 0.5%
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The S&P 500 rose 0.6%
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The Nasdaq 100 rose 0.3%
Currencies
Cryptocurrencies
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Bitcoin was little changed at $63,782.69
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Ether fell 0.2% to $3,272.64
Bonds
Commodities
This story was produced with the assistance of Bloomberg Automation.
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