Asian markets were flat on Wednesday as the world waited to hear from the US Federal Reserve on when it will stop buying assets and start raising interest rates, possibly putting pressure on its peers to follow suit.
Futures have already priced in an end to the cut by March and the first rate hike to 0.25% in May or June, with rates approaching 0.75% by the end of the year.
The latest BofA survey of fund managers shows that they favour an end to easing in April and only two rate hikes in 2022, making them more vulnerable to a hawkish outlook.
Also important will be the ultimate destination of rates, given that markets are currently set to peak at 1.5-1.75%, a level that is unlikely to even exceed inflation.
"At its core, there is an implicit assumption that all the Fed needs to do is hit the stock market brake by just 150bp and the economy will slow down enough to interrupt the inflation cycle," said Alan Raskin, macro strategist at Deutsche Bank.
"However, we have never had a cycle peak where real rates are not above zero, which means the market's expected final rate is too low and probably too low."
If Fed members agree and target a much higher peak, it would call into question the high valuation of equities and the low yield of Treasury bonds. Bonds currently suggest that money rates will average just 1.8% over the next 30 years.
The rapid spread of the Omicron option is an additional complication that could tilt the Fed towards a less hawkish stance, although officials have been more worried lately about maintaining inflation than a pandemic.
Whatever the Fed decides, it will set the bar for the EU, UK and Japanese central banks when they meet this week and increase pressure for further tightening in emerging markets.
Analysts at https://exness-ex.com/bonuses/ believe that so many potential pitfalls are making investors nervous and the broadest index of Asia-Pacific shares outside Japan MSCI was down 0.1% in slow trade.
Japan's Nikkei index fluctuated on either side of zero, while South Korea lost 0.2%.
Chinese blue chips were little changed as retail sales missed forecasts and rose 3.9%, while industrial production rose 3.6% more than expected.
EUROSTOXX 50 futures managed to rise 0.2%, while FTSE futures were unchanged. Nasdaq and S&P 500 futures remained unchanged, having declined overnight.
Treasury yields rose slightly on unexpectedly strong US producer price inflation data.
The ten-year yield jumped to 1.44% but still missed the recent high of 1.693%. The yield curve continued its flattening trend as investors expect that an earlier start of Fed policy tightening will lead to a slowdown in inflation in the longer term.
The prospect of higher short-term rates supported the US dollar, especially against the euro and yen where monetary policy is expected to lag.
The single currency remained at $1.1263, close to the recent low of $1.1184. The dollar strengthened to 113.71 yen and approached the 113.95 resistance level.
The dollar index held steady at 96.497, with bulls targeting the November peak of 96.938.
The risk of higher monetary rates was a burden on gold, which does not offer fixed gains, and left it sidelined at $1,772 an ounce.
Oil prices fell after the International Energy Agency (IEA) said the spread of a variant of the Omicron coronavirus would put a damper on global fuel demand recovery.
Brent crude fell 53 cents to $73.17 a barrel, while US crude lost 60 cents to $70.13 a barrel.
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