Asia stocks rally as US Fed rate cut bets gather momentum; ECB in focus

SINGAPORE: Asian shares gained on Thursday on rising expectations the US Federal Reserve will likely cut interest rates in September, while the euro advanced ahead of the European Central Bank policy meeting where a rate cut is widely expected.

The shifting Fed expectations lifted oil prices and dragged Treasury yields to their lowest in two months after data this week hinted the US labour market was easing.

MSCI's broadest index of Asia-Pacific shares outside Japan was 1.14 per cent higher, led by tech stocks. The index was on course for a 2.7 per cent gain in the week and snap its two-week losing streak. Japan's Nikkei rose 1 per cent.

 

China stocks also gained, with the blue-chip index up 0.38 per cent, while Hong Kong's Hang Seng index added 0.81 per cent.

Indian stocks were poised for a muted start to the session in a turbulent week after Prime Minister Narendra Modi was formally named to lead a new coalition government for a third straight term.

Modi will for the first time head a government dependent on the support of regional allies whose loyalties have wavered over time, which could complicate the new cabinet's reform agenda and has unnerved some investors.

On Wednesday, the S&P 500 and Nasdaq indexes hit record closing highs, with AI darling Nvidia becoming the world's second-most valuable company after breaching market valuation of $3 trillion and overtaking Apple. [.N]

The May private payrolls report on Wednesday was the latest data to suggest an easing in the labour market and comes after a report on Tuesday showed job openings fell in April to the fewest in more than three years.

Markets have taken their cue from the labour data this week and are now pricing in 49 basis points of cuts from the Fed this year, with a rate cut in September at 69 per cent chance compared with 47.5 per cent a week earlier, CME FedWatch tool showed.

"We're still in the Goldilocks range so bad economic news has been good for equities as Fed rate cuts are back on the table," said Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management.

Investor focus is now on the nonfarm payroll report for May due on Friday, with a Reuters poll of economists expecting it to increase by 185,000 jobs.

"We need that to be around 100-150k to maintain the Goldilocks narrative," Bennett said. "Much higher than that and yields could move back up, but if we get zero or negative, then we could be talking about a hard landing again."

Benchmark 10-year note yields were last at 4.2929 per cent in Asian hours. On Wednesday the yields fell to as low as 4.2750 per cent, the lowest since April 1. [US/]

In the currency market, the dollar was broadly lower, with the yen strengthening to 155.445 per dollar, close to a more than two-week high of 154.55 touched on Tuesday. [FRX/]

The euro was up 0.2 per cent at $1.089025, not far from the two-and-a-half month high it touched on Tuesday ahead of the ECB meeting that will kick off a fresh round of central bank policy reviews, with the Fed and the Bank of Japan due to meet next week.

The ECB is all but certain to cut interest rates from record highs on Thursday and is likely to acknowledge it has made progress in its battle against inflation, but also stress that the fight is not yet over.

Investor focus will be on comments and the economic projection to gauge what comes after the expected rate cut. Markets are pricing in 64 basis points of cuts this year.

Charu Chanana, head of currency strategy, said the key risk going into the meeting is if the ECB hawks fall short of the high bar or signal further rate cuts in a clear manner.

"The market can perceive this to be a policy mistake as a series of rate cuts can potentially exacerbate inflation in the medium term."

The Bank of Canada trimmed its key policy rate on Wednesday, the first G7 country to do so, in a widely expected move, but indicated further easing would be gradual and dependent on data.

In commodities, Brent crude futures rose 0.48 per cent to $78.79 a barrel, while US West Texas Intermediate crude futures rose 0.66 per cent to $74.55. [O/R]

 

(Reporting by Ankur Banerjee; Editing by Jacqueline Wong)