Asian Shares Rally as Rate Cuts Are Priced In, Central Bank Speakers Awaited
Asian shares continued their rally for the fourth consecutive session on Monday as markets priced in earlier rate cuts in the United States and Europe. However, this bullish sentiment will be put to the test this week as central bank speakers address the market.
Battered bond markets also saw a welcome recovery following a benign U.S. payrolls report and positive productivity numbers, which suggested that the labor market was cooling enough to potentially obviate the need for further rate increases from the Federal Reserve.
Bruce Kasman, head of economic research at JPMorgan, commented on the positive U.S. supply-side performance this year, stating that it raises hopes for a soft landing. He added that strong productivity and labor supply gains could encourage disinflation and allow for job growth and low inflation to coexist, potentially opening the path for early Fed easing.
Futures markets now imply a 90% chance that the Fed has finished raising rates and an 86% chance that the first easing will occur as soon as June. Similarly, markets suggest about an 80% probability that the European Central Bank will cut rates by April, while the Bank of England is expected to ease in August.
This week, central bankers will have the opportunity to weigh in on this dovish outlook, with at least nine Fed members, including Chair Jerome Powell, scheduled to speak. Speakers from the Bank of England and European Central Bank are also on the docket.
Australia’s central bank, however, is expected to resume raising rates at a policy meeting on Tuesday due to stubbornly high inflation.
The Bank of Japan is also gradually moving towards tightening its monetary policy. The head of the central bank stated on Monday that they were closer to achieving their inflation target, but it was still not enough to end ultra-loose policy.
Hopes for lower borrowing costs have helped MSCI’s broadest index of Asia-Pacific shares outside Japan gain 2.0%, following last week’s rally of 2.8%. Japan’s Nikkei rose another 2.4%, while South Korea climbed 4.3% as authorities re-imposed a ban on short-selling through mid-2024. Chinese blue chips also gained 1.3%.
In other markets, futures for the S&P 500 and Nasdaq were flat, while EUROSTOXX 50 futures showed little movement. FTSE futures saw a slight increase.
Bond markets experienced relief as two-year Treasury yields paused at 4.86% after falling 17 basis points last week. Yields on 10-year notes stood at 4.586%, considerably lower than October’s peak of 5.021%.
The retreat in Treasury yields weighed on the dollar, which remained near a six-week low at 105.080. The euro, on the other hand, remained firm at $1.0735 after surging 1% on Friday, reaching its highest level in two months. The dollar even lost ground against the yen to stand at 149.52, considerably lower than its recent high of 151.74.
Gold prices were supported by the drop in the dollar and yields, with gold hovering around $1,983, close to the five-month peak of $2,009.
Oil prices edged higher after a 6% decline last week, receiving support from confirmation that Saudi Arabia and Russia would continue their additional voluntary oil output cuts.
In the Middle East, Israel rejected calls for a ceasefire in Gaza on Sunday, with military specialists stating that operations against Palestinian Islamist group Hamas are set to intensify.
Brent crude added 43 cents to reach $85.32 per barrel, while U.S. crude climbed 54 cents to $81.05 per barrel.
Reporting by Wayne Cole; Editing by Sam Holmes