Asia Open: Ahead of the FOMC meeting all signposts point to a hawkish direction

Markets

US stocks are trading lower Tuesday amidst a tick-up in rates, even as housing starts to decline-- all ahead of Wednesday's FOMC meeting. Indeed, US stocks headed lower as traders donned their safety helmets and hunkered down in their Central Bank storm bunkers. Pre-FOMC trade has seen markets trimming at-risk positions as the traders prepared for significant high-volatility events. And given a widely expected Federal Reserve ( Fed) pause, the current cross-asset price reaction highlights how investors primarily focus on the forward policy trajectory.

US economic data is holding up much better than expected, and higher oil prices provide a solid counterargument against becoming too assured about US inflation returning to the Fed target; hence, traders are conceding the Fed is now in an extended policy regime of hold-or-hike -- and the bar to preemptive cuts is high.

Ahead of the FOMC meeting, yields on 10-year US Treasuries are reaching a new cycle high, and with investors seemingly inclined to hold onto their recently established long positions in the dollar, all signposts point to a hawkish direction.

Oil

Oil prices surged to session highs before the New York opening bell on Tuesday but then started to pull back as the unstoppable rally is yielding to the Fed in cross-asset and correlation fashion.

Forex

While trading slightly softer after the ECB was reportedly considering ways to address banks' excess liquidity, such as raising reserve requirements., the US dollar has remained close to its March highs, with the DXY index staying above the 105.00 level. The recent surge in oil prices, particularly Brent crude reaching $95 per barrel, has supported the dollar.

China

While the most recent set of policy supports gave some momentary ballast to Chinese assets - the constant counter-bullish trend squeezes are telling. However, the prevailing market sentiment seems driven by a desire for more significant stimulus or a substantial improvement in economic momentum.

Pulling it together: over the long term, the bull thesis remains very challenging ... but at current levels, it’s probably too risky to trade China from the short side.