Equities in Asia Rise on Signs of Easing Inflation, Expectations of Government Stimulus
Asian equities experienced a boost on Monday as investors responded positively to signs of easing inflation and expectations of more government stimulus in China. Chinese stock gauges led the gains, with the MSCI Emerging Markets Index rising by as much as 1%, reaching levels not seen since June of the previous year. This surge in Asian equities also helped push a regional index toward its highest closing level of the year. However, US equity futures and contracts on European stocks saw declines in Asia following a Friday rally that lifted the Nasdaq 100 nearly 2%.
The demand for risk assets in Asia comes as key US inflation gauges continue to ease, sparking fresh optimism that a soft landing for the world’s largest economy may be within reach. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, described the inflation outlook as “quite positive,” despite anticipated job losses and slower growth.
In an effort to contain a selloff, the Bank of Japan (BOJ) announced unscheduled bond-purchase operations to buy debt after stating on Friday that it would allow yields to rise above a 0.5% cap. As a result, the yen swung to a loss against the dollar. Joey Chew, Head of Asia FX Research for HSBC, speculated that the BOJ’s move could be a small step towards the end of their yield curve control policy, although any significant adjustments are likely to occur in the future.
The manufacturing Purchasing Managers’ Index (PMI) data for China in July remained in contraction but surpassed estimates. The Chinese government also revealed additional efforts to support the economy on Friday, including plans to boost consumer industries and steps to grow an exchange dedicated to aiding small firms’ access to funds.
Chinese stocks opened higher on Monday, extending the gains from the previous week. The CSI 300 Index climbed as much as 1.8%, marking its highest monthly gain since January. The Hang Seng China Enterprises Index, which tracks mainland stocks listed in Hong Kong, rose more than 3%. Analysts noted that there is increasing confidence in China’s commitment to supporting the economy through concrete measures.
Currency and bond markets may face continued volatility as investors assess whether the recent rate hikes by the Federal Reserve and the European Central Bank mark the end of their tightening cycles.
This week, attention will be focused on central bank meetings in Australia and the United Kingdom, where the Reserve Bank of Australia and the Bank of England are set to make their rate decisions, respectively. The Bank of Japan’s decision to allow 10-year bond yields to rise above their previous cap could potentially have implications for global assets tied to Japanese money.
Furthermore, any significant adjustments to Japan’s yield curve control policy could impact the Treasury market, as Japanese households are among the largest buyers of US debt. Consequently, the rise in attractive Japanese yields may lead to selling of US government bonds in favor of Japanese debt. As a result, rates on 10-year Treasury notes rose 4 basis points to 3.99% in Asia.
In other market news, oil prices were slightly lower on Monday but are on track for a monthly gain as market data indicates tightening supplies and high demand. This has been attributed to OPEC+ production cuts.
Key events to watch this week include manufacturing PMI readings, unemployment reports, and central bank rate decisions across various economies, including Australia, the Eurozone, and the United Kingdom.
On Friday, Meta Platforms Inc., Tesla Inc., and Intel Corp. experienced notable gains in the US stock market. US-traded Chinese stocks also saw significant gains, with the Golden Dragon Index rising by 7%.
In summary, equities in Asia rose on Monday as investors responded positively to signs of easing inflation and expectations of government stimulus in China. Chinese stock gauges led the gains, and the stock rally in Asia pushed the MSCI Emerging Markets Index higher. However, US equity futures and contracts on European stocks declined. The Bank of Japan’s decision to allow bond yields to rise above their previous cap and the release of better-than-expected manufacturing PMI data for China also contributed to market optimism.