Stocks Rally as Fed’s Rate Hikes Seen Near End: Markets Wrap

2023-11-02 15:20

Stocks and currencies in Asia rallied after yields on US Treasuries tumbled Wednesday as investors weighed the possible

Stocks Rally as Fed’s Rate Hikes Seen Near End: Markets Wrap

Stocks and currencies in Asia rallied after yields on US Treasuries tumbled Wednesday as investors weighed the possible peak of the Federal Reserve’s historic tightening campaign. European share futures also gained.

Equity benchmarks advanced across the region from Sydney to Hong Kong, with tech firms at the forefront. The South Korean won led emerging-market currencies higher, while the yen also advanced. US stock futures held their gains.

The rebound indicated relief among investors in Asian stocks, which had lost over 12% since the end of July through October. Investors had fretted over the expectation of higher-for-longer US rates and that the US central bank would continue to raise rates into 2024.

While Fed officials have left the door open to another increase, Federal Reserve officials hinted that a run-up in long-term Treasury yields reduces the impetus to tighten policy further.

Following a 20-basis-point slump in Treasury 10-year yields on Wednesday, bonds in the region rallied. New Zealand yields led the decline with a 25-basis-point drop, while those on Japanese bonds fell despite weak demand at the country’s first bond sale since the central bank loosened its grip on its yield curve control policy on Tuesday.

“The headwind from higher rate and a higher USD should abate for EM and Asian assets and ease some of the pressures on Asian central banks that have been recently hiking and been focused on currency moves,” said Kerry Craig, a global market strategist at JPMorgan Asset Management. “However, a weaker growth outlook for the US economy suggests weaker demand which may weigh on export growth across the global goods chain.”

US yields were already heading lower before the Fed decision after the government announced plans to borrow slightly less than expected over the next three months, reassuring investors worried about a deluge of debt issuance. A gauge of US factory activity also came in below expectations, adding to concerns of an economic downturn.

Lower Treasury yields weighed on the greenback, which weakened against major currencies, and helped buttress the yen. The Japanese currency strengthened early Thursday extending gains from Wednesday.

Fed Chair Jerome Powell noted that financial conditions have “tightened significantly in recent months driven by higher, longer—term bond yields, among other factors.” He repeatedly said the committee was moving “carefully,” a wording that often has signaled a low likelihood of any immediate change in policy, while adding that risks to the outlook have become more two-sided as the tightening campaign nears its end.

“Given that markets are starting to assume the Fed’s tightening cycle is over, markets may soon begin to discount an economic recovery to occur later in 2024,” said David Chao, Global Market Strategist, Asia Pacific (ex-Japan) at Invesco. “We expect a growing global risk appetite.”

Mixed Picture

US jobs data painted a mixed picture. There were more job openings than forecast, according to the latest JOLTS data, while ADP’s private payrolls figures showed fewer new roles than anticipated. Initial jobless claims figures will be released later Thursday.

Some observers cautioned against reading too much into Powell’s words. “I don’t think it’s the turning point just yet,” said Matthew Haupt, fund manager at Wilson Asset Management. “Fed is trying to hold curves where they are, so conditions don’t turn too easy too quick.”

Elsewhere, the Bank of England is expected to hold rates for a second consecutive meeting Thursday, as inflation concerns ease.

Back in Asia, South Korea’s inflation unexpectedly accelerated in October, reinforcing the case for the local central bank to keep its restrictive policy in place for longer. Meantime, Japanese Prime Minister Fumio Kishida announced a larger-than-expected economic stimulus package.

Other economic releases Thursday include a monetary policy decision in Malaysia and PMI data for Singapore. Investors will also be keeping an eye on earnings releases from Tata Motors Ltd and Adani Enterprises Ltd., while Apple Inc will deliver its latest earnings later on Thursday in the US.

Semiconductor manufacturers and related stocks jumped after AMD provided a strong sales forecast of its new processor with SK Hynix and Samsung Electronics leading the way. Meanwhile, Mitsubishi Corp. slumped most since June after it announced it will conduct a three-for-one stock split in January.

In commodities, West Texas Intermediate, the US oil benchmark, advanced more than 1% to above $81 per barrel, retracing a Wednesday decline. Gold edged higher while Bitcoin traded largely unchanged at around $35,500.

Key events this week:

Eurozone S&P Global Eurozone Manufacturing PMI, Thursday
Bank of England interest rate decision. Governor Andrew Bailey holds news conference, Thursday
US factory orders, initial jobless claims, productivity, Thursday
Apple earnings, Thursday
China Caixin services PMI, Friday
Eurozone unemployment, Friday
US unemployment, nonfarm payrolls, Friday
Canada employment report, Friday

Here are some of the major moves in markets:

Stocks