US Fed watch: The US Fed meeting has been kickstarted and the markets are shuffling around in anticipation. US equities at time of writing are putting in a mixed performance, though al major Wall Street indices remain trading below key technical levels. It comes following a day in which Asian and European markets sold-off in sympathy with Monday night’s rout in North American shares. A desire for safety has supported a bid in US Treasuries: they are higher across the board. Interest rates traders are also grinding away, pricing out point-by-point interest rates hikes from the Fed in 2019. The US Dollar has dipped as traders take safety in other haven currencies: the US Dollar Index is below 97, mostly courtesy of a play into the EUR and the Japanese Yen. The weaker greenback has provided a lift in gold prices, with the yellow metal trading just below support at $US1250 per ounce.

The Fed’s biggest critic: Everyone has an opinion on what the Fed ought to do, it seems. The most powerful voice of all, US President Donald Trump, has certainly weighed in on the subject, Tweeting: “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!” Never mind that President Trump’s policies, from major tax cuts and his trade war have contributed to the Fed’s invidious position. The President clearly is noting his concern about one of his hitherto favourite measures of personal success: the health of the US stock market. Whether rightly or wrongly, market participants, as contained within the price action in global markets, appear to agree with President Trump.

Market sentiment: Cool it with the hikes, guys! Is the message. Traders obviously can’t take much of it any more. Risk is off the table and bets are being placed that we are in for a “dovish hike”. That is: a hike tomorrow, but a very careful downgrade in the projections for future hikes. It’s an incredibly tight rope the Fed must walk. On one hand, they’ll need to assure markets that they remain accommodative of US (and the globe’s) financial and economic health; while on the other, they can’t seem so accommodative as to reveal a level of genuine fear about what could be in store for markets and the economy in the future. The problem is, markets are going deep on the notion that a dovish Fed is upon us. The possibility is that the markets have set the bar too low.

The big risk: Thus, even a sprinkling of hawkishness about rates could prompt a big repositioning in markets. The first reaction would be in rates markets, but that would transfer quickly into the prices of US Treasuries. Overnight, the yield on the US 2 Year note and the US 10 Year note dropped by 4 and 3 points, respectively. The spread between those two assets has gradually widened since narrowing to about 9 point a fortnight or-so ago, to sit around 17 points now. The back end of the curve will remain mostly responsive to growth and inflation expectations, but if the Fed adopt a more hawkish line, yields on the 2 Years could rally-hard, re-narrowing spread considerably. Out would come the recessionistas in such an event and the global share market, led by Wall Street indices, could possibly convulse.

Danger signs still flashing: Highly sensitive market-participants wouldn’t appreciate the shock. Again, in last night’s session, amber lights were flashing in certain segments of the market. Junk bonds suffered the most, with the spread on high yield credit widening to multi-year highs. The dynamic was fuelled by another tumble in oil prices on fears of a slow-down in economic activity will cause a supply glut. Thinner liquidity brought about by tighter financial conditions isn’t making the situation any more manageable. The price of WTI is now at $US46 per barrel at time of writing, having fallen over 7 per cent in the last 24 hours. Energy stocks the world over, not mentioned the Loonie, have dropped, and assets pricing in implied inflation have modestly dipped – portending further difficulty for the likes of the Fed to maintain price growth at targeted levels.

ASX resilience: SPI futures have been whipping around a bit in late American trade. There’s an hour to go on Wall Street as this is being written, and the major share indices are gravitating back to their opening price. It could be risk is (justifiably) being taken off the table here in anticipation for the Fed. So: futures are suggesting a give-up of 8 points for the ASX200 at the outset, adding to yesterday’s pain. To the credit to the Aussie index, the 5600-level isn’t being let go without a fight. The buyers entered the market yesterday on numerous occasions to push the market above that point, only to be overwhelmed by sellers, who rammed home the overwhelming negative sentiment. Technical indicators aren’t necessarily pointing entirely to sustained downside in the ASX200, but a succession of lower-highs in the past few sessions indicate the bulls could be getting exhausted.

What’ll save us? Australian equities never became quite as elevated as their US counterparts did over the last decade, perhaps implying if we are entering a bear market, ours won’t be as severe. However, given the share market self-off has been inspired by fears of slower global growth, Australia’s exposure to any wreckage is all but unavoidable. The miners haven’t demonstrated the sort of stress one might expect, but the banks are being belted (they gave up 27 points yesterday), while the health care sector is unwinding the market leading gains of the year and the energy space is falling with the oil price. Arguably the best thing that could happen is a truce in the trade war to ease burden on the Australian economy; however, after Xi Jinping’s defiant speech yesterday, plus the issues of tighter financial conditions, perhaps the benefit of any improvement in global trade relations trade will be marginal.