Asian Stocks Echo US Rally on Soft Landing Hopes:
Yen declines after unscheduled Bank of Japan bond buying
China manufacturing PMI data shows contraction in July
Equities in Asia rose Monday following a rally on Wall Street as investors embraced fresh signs that inflation is easing further. Chinese stock gauges led gains on expectations of more government stimulus.
Shares in Japan and Korea also rose, helping to push a regional index toward the highest closing level of the year. Gains for Chinese equities pushed the MSCI Emerging Markets Index as much as 1% higher, headed to levels not seen since June last year. US equity futures and contracts on European stocks fell in Asia amid a rally Friday that pushed the Nasdaq 100 nearly 2% higher.
The demand for risk assets comes after further easing in key US inflation gauges, signaling fresh optimism that a soft landing for the world’s biggest economy is within reach. Federal Reserve Bank of Minneapolis President Neel Kashkari described the inflation outlook as “quite positive,” despite the likelihood of job losses and slower growth.
The Bank of Japan announced unscheduled bond-purchase operations to buy debt, seeking to contain a selloff after it said Friday it will allow yields to rise above a 0.5% cap. The yen swung to a loss against the dollar.
Friday’s move by the BOJ is “possibly a very small step towards the end of YCC,” Joey Chew, head of Asia FX research for HSBC said on Bloomberg Television, referring to the yield curve control policy. “They could very well give up YCC but I think that could be something more for next year.”
July manufacturing PMI data for China remained in contraction but beat estimates. More government efforts to shore up the economy emerged on Friday, including a plan to boost consumer industries and steps to grow an exchange dedicated to helping small firms get access to funds.
Chinese stocks rose from Monday’s open, extending last week’s gains. The CSI 300 Index climbed as much as 1.8%, taking its monthly gains to 5.8%, the most since January. The Hang Seng China Enterprises Index, which tracks mainland stocks listed in Hong Kong, rose by over 3%.
“The government’s stance has clearly turned more supportive,” said Vey-Sern Ling, managing director at Union Bancaire Privee. There is more confidence that China will back up stimulus talk with concrete measures, he added.
Currency and bond markets face the risk of continued volatility as investors weigh whether rate hikes from the Federal Reserve and European Central Bank last week mark the end of their tightening cycles.
The Australian dollar and British pound are likely to remain in the spotlight with their central banks slated to meet on Tuesday and Thursday, respectively.
“The RBA has delivered a lot of rate hikes already,” said Katrina Ell, senior economist for Moody’s Analytics Inc, in an interview with Bloomberg Television. “Our expectation is they will hold tomorrow but it’s likely they will have to deliver another rate hike just to keep inflation on that entrenched down trend.”
Japan’s industrial production rebounded in June on Monday amid a resilient economic recovery, while another report showed that the nation’s retail sales fell 0.4%, compared with a 0.7% decline forecast by analysts.
On Friday, BOJ Governor Kazuo Ueda said the central bank would allow 10-year bond yields to rise above a ceiling it now calls a point of reference. That paves the way for a future normalization of policy that has implications for a wide range of global assets heavily exposed to Japanese money.
Yields on 10-year Japanese bonds jumped to their highest in nine years as investors speculated whether this tweak to BOJ’s yield curve control was a precursor to more drastic changes for its ultra-easy monetary policy.
Any significant adjustment to the YCC policy would have implications for the Treasury market given that Japan households are one of the largest buyers of US debt, according to Dennis DeBusschere founder of 22V Research. The rationale is: if yields in Japan become more attractive, there could be selling of US government bonds to buy the Asian nation’s debt. Rates on 10-year Treasury notes rose 4 basis points to 3.99% in Asia.
On Friday, Meta Platforms Inc. and Tesla Inc. each climbed more than 4%, while Intel Corp. rallied about 6.5% on a bullish sales forecast. The Golden Dragon Index of US-traded Chinese stocks gained 7%.
Elsewhere in markets, oil was slightly lower Monday but headed for a monthly gain, supported by signs the market is tightening amid estimates that crude demand is running at a record clip just as OPEC+ cuts back supplies.
Key events this week:
- Australia RBA rate decision, Tuesday
- Eurozone S&P Global Eurozone Manufacturing PMI, unemployment, Tuesday
- UK S&P Global/CIPS UK Manufacturing PMI, Tuesday
- US construction spending, ISM Manufacturing, job openings, light vehicle sales, Tuesday
- China Caixin Services PMI, Thursday
- Eurozone S&P Global Eurozone Services PMI, PPI, Thursday
- UK BOE rate decision, Thursday
- US initial jobless claims, productivity, factory orders, ISM Services, Thursday
- Eurozone retail sales, Friday
- US unemployment rate, non-farm payrolls, Friday
- S&P 500 futures fell 0.1% as of 6:44 a.m. London time. The S&P 500 rose 1% Friday
- Nasdaq 100 futures fell 0.2%. The Nasdaq 100 rose 1.8%
- Japan’s Topix rose 1.3%
- Australia’s S&P/ASX 200 fell 0.1%
- Hong Kong’s Hang Seng rose 1.3%
- The Shanghai Composite rose 0.4%
- Euro Stoxx 50 futures fell 0.4%
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro was little changed at $1.1007
- The Japanese yen fell 0.5% to 141.88 per dollar
- The offshore yuan was little changed at 7.1483 per dollar
- The Australian dollar rose 0.5% to $0.6680
- The British pound was little changed at $1.2845
- Bitcoin rose 0.4% to $29,397.55
- Ether was little changed at $1,864.44
- The yield on 10-year Treasuries advanced four basis points to 3.99%
- Japan’s 10-year yield advanced 6.5 basis points to 0.605%
- Australia’s 10-year yield declined two basis points to 4.05%
- West Texas Intermediate crude fell 0.4% to $80.27 a barrel
- Spot gold fell 0.3% to $1,954.08 an ounce