Asian markets and gold drop, dollar boosted on Fed rate worries

An employee takes granules of 99.99% pure gold in Krasnoyarsk, Russia. (Reuters pic)

HONG KONG: Asian equities suffered fresh losses, the dollar rose and gold retreated Wednesday after top Federal Reserve officials dented hopes for a big interest rate cut next month, while traders are also fretting over this week’s meeting between Donald Trump and Xi Jinping.

Adding to the downward pressure were concerns about worsening tensions between the US and Iran, though a drop in US stockpiles boosted oil prices.

Global markets had been on a healthy rally for more than a week after Trump hailed phone talks with his Chinese counterpart and said they would meet to discuss their trade war on the sidelines of the G20 summit in Osaka.

That coincided with a dovish lean from the US central bank that raised expectations that it would soon announce its first-rate reduction for more than a decade.

However, optimism took a hit Tuesday after Fed boss Jerome Powell warned about the outlook for the US economy but said policymakers would not “overreact” to recent data.

Also Tuesday, St Louis Fed president James Bullard, considered a key dove on the board, told Bloomberg a cut of 50 basis points – which many investors had been hoping for – would be excessive.

The remarks hit equities with Wall Street’s three main indexes sharply lower and the dollar, which has come under heavy pressure of late, bounced back against its major peers and other higher yielding but riskier currencies.

“Bullard… dashed the hopes of many investors who were expecting the Fed to kick-start this easing cycle with a bang,” said Edward Moya, senior market analyst at OANDA. “With the most dovish member taking a 50-basis point cut off the table, the dollar surged as equities tumbled.”

Oil prices rally

The weaker dollar put a cap on gold’s rally, with the yellow metal’s safe-haven status in times of turmoil unable to stop it sinking from six-year highs.

Investors are keeping their focus on the planned meeting between Trump and Xi in Japan, though the US side dampened expectations for a deal between the two, saying the talks would set out a path for an agreement.

However, officials did say they were willing to hold off hiking tariffs on more Chinese goods, Bloomberg News reported.

Still, observers expect the issue to continue for some time.

“The US-China trade war stalemate is likely to continue as political considerations reign supreme,” said brokerage T Rowe Price.

“With President Trump facing re-election in 2020, he may want to put off any agreement until next year, while China may want to deny President Trump a trade success to damage his re-election prospects, allowing Beijing to negotiate with his successor.”

Crude surged after data showed a 7.55-million-barrel decline in US inventories, with Iran tensions also buoying the market.

“Oil prices went ballistic” after the report from industry group the American Petroleum Institute, said Stephen Innes of Vanguard Markets. “This is a strong signal for the energy market.”