Asia-Pacific Markets Rise
Asia-Pacific stocks reached a 27-month high on Thursday, driven by expectations of a potential rate cut in the United States. This surge was fueled by softer U.S. economic data, which reduced the likelihood of a September rate hike, boosting bonds and commodities while weakening the dollar.
In Japan, the Nikkei index rose by 0.4%, nearing its March peak, while the broader Topix index achieved an all-time high. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed by 0.7%, marking its highest point since April 2022.
Thin Trading Due to U.S. Holiday
Trading volumes were thin due to a public holiday in the United States, with investors eagerly awaiting the results of the UK election. Opinion polls have consistently suggested a landslide victory for the Labour Party over the Conservatives.
“The Labour party has relatively modest tax and spending plans, with the overall goal of shrinking the UK’s large budget deficit,” CBA analysts noted. “The Labour government’s policies will also move the UK back towards closer alignment with the EU.”
European Markets Steady
Across the English Channel, polls indicated that the National Rally (RN) was unlikely to secure a majority in Sunday’s French election, as mainstream parties sought to block the far-right movement.
FTSE futures inched up by 0.1%, while sterling strengthened to $1.2750. EUROSTOXX 50 futures remained relatively unchanged.
U.S. Economic Data and Market Reactions
In the United States, S&P 500 futures and Nasdaq futures remained steady after reaching record highs overnight, influenced by weaker-than-expected economic data. The U.S. ISM measure of services activity fell to its lowest level since mid-2020, with a notable decline in employment ahead of the June payrolls report.
Despite some analysts pointing out contradictions in the data, the overall sentiment was one of easing inflation, which further bolstered expectations for a rate cut.
Economic Indicators and Fed Outlook
The Citi U.S. economic surprise index fell to -47.5, its lowest since August 2022. Meanwhile, the Atlanta Fed’s GDPNow estimate dropped to 1.5% from 1.7%, indicating a slowdown in economic growth.
Minutes from the Federal Reserve’s last meeting revealed that committee members were waiting for more evidence of a cooling economy before deciding on rate cuts.
“Reading through the minutes from only three weeks ago, it is a good reminder of how quickly the activity outlook has deteriorated,” said Paul Ashworth, chief North America economist at Capital Economics. “We still think that the Fed will begin to cut interest rates this September.”
Market Adjustments and Currency Movements
The probability of a September rate cut increased to 74% from 65%, with markets pricing in 47 basis points of easing for this year. Yields on 10-year Treasuries dropped 8 basis points to 4.355%.
With the U.S. economy appearing less robust, the dollar weakened across the board. The euro rose to $1.0793, and the dollar index hit a three-week low. The Australian dollar reached a six-month peak of $0.6733, with markets speculating on potential rate hikes.
In contrast, the yen continued to struggle, reaching multi-year lows against several currencies as investors favored carry trades. The dollar stood at 161.40 yen after hitting a 38-year high of 161.96 overnight.
Commodity Markets
The drop in the dollar benefited commodities, with gold rallying to $2,358 an ounce, up from $2,318 at the start of the week. Oil prices eased slightly, following an overnight gain due to a significant decline in U.S. crude stocks, indicating stronger demand as the U.S. driving season begins. Brent crude dipped 31 cents to $87.03 a barrel, while U.S. crude fell 33 cents to $83.55 per barrel.
