Asian equities could trade choppy following a backfoot trading on Wall Street, with US equities closing at session lows. Participants are eyeing a busy hawkish Central Bank week. Also weighing on sentiment is the thin liquidity conditions heading into the Christmas holidays and options/indexes expiry (Quadruple Witching) on Friday.
On the COVID front, news remains light, although the UK raised its COVID alert level to 4 from 3 while the Health Secretary sounded rather cautious on the variant on Monday. For the week ahead, major risk events on the radar that affect the price action cross-asset are primarily Fed, ECB and BoE later in the week. The hawkish tone seen by many FOMC voters and Chair Jerome Powell points that the Committee will shift in a hawkish direction at the Wednesday meeting as it eyes rising inflation risks.
This shift could include a doubling of the pace of the asset purchase taper, a more aggressive rate “dot plot”, and an adjustment in the Statement language (including eliminating the word “transitory” to define inflation). If the “dot plot” projects more than two hikes next year or a hiking pace faster than three hikes per year, it would be more hawkish than current market expectations. Risk assets/EM could take a big hit, the USD might strengthen, and the short-term rates could cause some positioning reversal chock that would raise the risk-premia in Corporate and Sovereign bond markets.
