Asia equities rise, bonds fall as speculators expect a greater Fed decrease
Asian stocks followed Wall Street’s upward trend on Wednesday, while bonds experienced a decline as traders solidified their expectations that softness in the US labor market would lead the Federal Reserve to reduce rates by at least a quarter point in the upcoming week. Gold paused after reaching a record high on Tuesday, while the dollar edged upward. Two critical days of US inflation figures, beginning later on Wednesday, are poised to provide the essential data that will guide the Fed’s decision on September 17.
Crude oil remained high following Israel’s strike on Hamas leadership in Qatar. Japan’s Nikkei increased by 0.3 percent, South Korea’s KOSPI surged by 1.3 percent, and Taiwan’s equity benchmark rose by 1 percent. Hong Kong’s Hang Seng increased by 0.5 per cent, whereas mainland Chinese blue chips saw a rise of 0.2 per cent. Overnight, the S&P 500, Nasdaq Composite, and the Dow Jones Industrial Average each concluded the day at new all-time highs. S&P 500 futures indicated a 0.2 percent increase on Wednesday. Traders view a rate cut by the Fed next Wednesday as a certainty, with 7 percent odds placed on a substantial half-point reduction. A week earlier, markets assigned a 7 percent probability on the Fed holding rates steady, but another dismal monthly payroll number last week convinced investors that the Fed had no cushion to wait any longer to support the economy.
The last obstacles to that perspective will arise on Wednesday and Thursday, manifested through producer and consumer inflation readings, respectively. “An upside inflation surprise could rock the boat slightly and lead to an unwinding of rate cut probabilities, not so much for September, but for subsequent months,” said Kyle Rodda. The swift decline in US economic indicators, especially regarding employment, “is the reason why markets are pricing in such aggressive easing from the Fed – which, incidentally, the markets appear to believe will be enough to protect the US economy from a recession, judging by current risk appetite,” Rodda added. US Treasury bonds, recognized as a traditional safe-haven asset, experienced a decline for a second consecutive day on Wednesday, resulting in an increase in yields. The 10-year Treasury yield increased by nearly 2 basis points to 4.093 percent, following a rise of almost 3 basis points on Tuesday.
Japanese government bond yields increased by 1.5 basis points, reaching 1.575 per cent. The US dollar maintained its gains from Tuesday against major peers in the latest session. The dollar index, which measures the currency against six rivals, remained unchanged at 97.78, following a slight increase at the start of Wednesday. The greenback remained relatively stable at $1.1705 per euro, experiencing a slight decline of 0.06 percent to 147.33 yen. The European Central Bank is set to announce its policy this Thursday, with expectations leaning towards maintaining the current interest rates. A month ago, economists were divided on the chances of additional rate cuts by the ECB, but recent data indicating inflation near the 2 per cent target and unemployment at an all-time low has changed the sentiment. The Bank of Japan is set to announce its latest policy decision on Friday next week, with widespread anticipation that it will refrain from implementing a rate hike at this juncture.
On Tuesday, reports were indicating that the BOJ might delay tightening policy, whereas other reports from premier financial outlets reported that policymakers are considering a rate hike within the year. Investors have been closely observing the political landscape, particularly regarding the successor to Shigeru Ishiba as Japan’s next prime minister, as well as the resilience of France’s newly appointed fifth prime minister in just two years. Gold increased by 0.2 percent to $3,633 per ounce, following a remarkable rise to an all-time high of $3,673.95 the previous day.
Brent crude futures increased by 0.5 per cent, reaching $66.74 a barrel, while US West Texas Intermediate crude futures saw a rise of 0.6 per cent, climbing to $62.99 a barrel. Prices had increased by 0.6 percent in the prior trading session following Israel’s announcement of an attack on Hamas leadership in Doha. Qatar’s prime minister indicated that this action could jeopardize peace talks between Hamas and Israel.
