Market Update: Asian Shares Rally, Dollar Slides amid Speculation of Fed's Hiking Cycle Conclusion

A Positive Outlook for Asian Shares and Bonds

Asian shares and bonds experienced a notable rally on Thursday, while the dollar sustained substantial losses. The market was influenced by a surprising downturn in U.S. inflation, leading to speculation that the post-pandemic tightening cycle may be nearing its end.

Examining China Trade Data and Its Impact

Investors are eagerly awaiting China's trade data to indicate the performance of the world's second-largest economy following several disappointing economic releases. Recent data released on Thursday morning showed that exports rose by 3.7% in yuan-denominated terms in the first half of the year, while imports remained relatively stable. Additional data is expected to be released later in the day.

Positive Performance in Asia-Pacific Shares

MSCI's broadest index of Asia-Pacific shares outside Japan, represented by (.MIAPJ0000PUS), surged by 1.5%, primarily driven by a 2.1% jump in Hong Kong's Hang Seng index (.HSI) and a 1.4% gain in Australia's resources-heavy shares (.AXJO). Japan's Nikkei (.N225) also experienced a solid advancement of 1.2%.

Encouraging Rally for Chinese Tech Giants

Chinese tech giants listed in Hong Kong (.HSTECH) demonstrated a strong rally of 3% during early trade. This surge was attributed to Premier Li Qiang's call for these companies to support the slowing economy. It serves as yet another sign that the extensive crackdown on the sector, which has lasted for several years, is now coming to a close.

U.S. Consumer Inflation Report Presents Promising Results

The highly anticipated U.S. consumer inflation report delivered better news than initially anticipated. In June, the Consumer Price Index (CPI) rose by 3% compared to the previous year, falling below expectations of a 3.1% increase. This figure starkly contrasts the 9.1% rise witnessed in the same month last year. Furthermore, core inflation, which has been a source of concern for the Federal Reserve (Fed), also displayed a more substantial-than-expected slowdown.

Positive Response from Wall Street

Wall Street responded positively to the report, with the Nasdaq (.IXIC) climbing by 1.2% and the S&P 500 (.SPX) gaining 0.7%. Michael Feroli, the chief U.S. economist at JPMorgan, expressed optimism, stating, "With the usual caveat of one month not making a trend, the narrow path to a soft landing looks a smidgeon wider this morning." He added, "There may be a few doves on the FOMC who would be willing to see how far this process can run without additional tightening, but we expect that the Fed leadership is still strongly inclined to hike in two weeks... before the Committee goes on an extended pause."

Market Expectations and Forecasts

Despite the positive sentiments, futures currently imply a 94% probability of a quarter-point hike from the Fed later this month. However, the likelihood of another hike in September has decreased to 13.2% from 22.3% the previous day, according to the CME FedWatch Tool. Additionally, futures prices now indicate a projected 125 basis points in rate cuts for 2024.

Relief for Bonds and a Weakening U.S. Dollar

Following a significant sell-off that sent global yields soaring last week, bonds experienced a sigh of relief. The ten-year Treasury yield, which stood at 3.8534% in Asia, plummeted by 12 basis points overnight, a notable decline from the seven-month peak of 4.0940% reached on Friday. Similarly, rate-sensitive two-year yields remained relatively stable at 4.7272% in Asia after a substantial drop of 15 basis points overnight, leading to a steepening in the yield curve.

Simultaneously, the U.S. dollar slumped to a fresh 15-month low against major currencies. This decline alleviated pressure on emerging market currencies and allowed Asian policymakers greater flexibility in implementing monetary policy.

The Influence of the Euro and the Japanese Yen

The euro surged to a fresh 15-month high of $1.1144 on Thursday, following an overnight increase of 1.1%. This rise was driven by expectations of a more hawkish stance from the European Central Bank, considering the anticipated conclusion of the Fed's hiking cycle.

Additionally, the Japanese yen, which had been subject to extensive selling pressure due to Japan's ultra-easy monetary policy, gained 6 yen against the dollar over several sessions. It was last valued at 138.26 per dollar. Alan Ruskin, the chief international strategist at Deutsche Bank, commented on the situation, stating, "The Fed's leadership in the global rate cycle will increasingly play against the dollar, as central banks pivot from rate hiking to rate cutting."

Divergent Monetary Policies in Canada

In Canada, the risk remains tilted towards further tightening. The Bank of Canada recently raised rates by a quarter-point to 5%, and the governor expressed readiness to take additional measures if necessary.

Oil Prices Remain Steady, Gold Prices Flat

Elsewhere, oil prices settled near a two-month high due to a weakened U.S. dollar. Brent crude futures increased by 0.2% to reach $80.29 per barrel, while U.S. West Texas Intermediate crude futures rose by 0.2% to $75.88.

Conversely, gold prices remained flat at $1,957.09 per ounce.

Summary

The recent market developments reflect a positive sentiment in Asian shares and bonds, primarily influenced by the unexpected decline in U.S. inflation. As the Federal Reserve's hiking cycle nears its conclusion, investors and analysts are carefully evaluating trade data from China and reassessing market expectations for rate hikes and cuts. Furthermore, the weakening U.S. dollar has prompted shifts in various currencies, with the euro and the Japanese yen showing particular strength. As global monetary policies evolve, monitoring how central banks navigate the changing landscape remains essential to maintain stability and foster economic growth.