Jamie McGeever takes a look at the day ahead in Asian markets.
Federal Reserve Chair Jerome Powell could set the market tone for the rest of the year on Wednesday when he spoke about the U.S. economic outlook and labor market at an event in Washington.
Powell may have to be uber-hawkish if he is to tame investors' animal spirits and tighten financial conditions because of the fact that stocks have recently held up in the face of policymakers hawkish remarks, patchy economic data and unprecedented protests in China.
Tuesday's surge in Asian and Chinese stocks was due to hopes that the civil discontent in China could prompt the easing of strict COVID 19 curbs and the re-opening of the economy.
There isn't a indication that Beijing will lean in that direction, but that's what investors are banking on. Chinese stocks rose by 3% on Tuesday for their fourth-biggest rise this year, and MSCI's Asia ex-Japan index rose 2.4% for its seventh-best day this year.
On Tuesday, the VIX 'fear index fell, indicating investors are sanguine about downside risks, although Wall Street closed in the red on Tuesday.
Powell and colleagues are frustrated that the U.S. financial conditions have slowed in recent weeks despite their increasingly tough stance on inflation. Since Wall Street bottomed in October, Goldman's financial condition index has fallen almost 100 basis points, mainly due to the rebound in stocks.
It may not be much more Powell can say beyond what his colleagues James Bullard and John Williams have already said this week, namely that rates will have to stay highly restrictive for some time and may not be cut until 2024.
The message is not being heeded by investors and traders, with rates markets still pricing in around 40 bps of Fed easing next year. If Powell wants to address that, he will have to find the words to get that message across.
Three key developments that could give more direction to markets on Wednesday are: