Cautious Optimism Prevails as Asian Stocks Rise, Investors Await China Data and Fed Speeches
Asian stocks showed a cautious upward trend on Monday as investors awaited the release of China’s industrial and retail data, while also anticipating speeches from several U.S. Federal Reserve officials. These events were seen as important factors to validate market expectations of potential rate cuts later this year.
This guarded optimism is expected to carry over to European markets, with futures for the pan-region Euro Stoxx 50 index indicating a 0.2% increase. However, futures for the S&P 500 and Nasdaq remained mostly flat.
In emerging markets, the Turkish lira touched a two-month low due to weekend elections that appeared to be heading for a runoff, while the Thai baht rallied nearly 1% following a successful showing by Thailand’s opposition in weekend polls, which routed military-allied parties.
MSCI’s broadest index of Asia-Pacific shares outside Japan initially experienced losses but later reversed course to show a 0.5% gain, driven by a late rebound in Chinese and Hong Kong shares following a significant sell-off the previous week. Hong Kong’s Hang Seng index surged 1.2% higher, while China’s blue-chip stocks rose 0.6%. Japan’s Nikkei also advanced 0.7%, building on the positive sentiment from the previous week’s earnings season.
China’s central bank maintained rates on medium-term policy loans on Monday, but expectations are growing that monetary policy easing may become inevitable in the coming months to support economic recovery.
Hong Kong Exchanges & Clearing Ltd (HKEX) introduced a new Connect scheme on Monday, expanding into onshore interest rate derivatives to link the financial hub’s markets with the mainland. This move aims to help offshore investors hedge their exposure to Chinese bonds.
On Tuesday, China is set to report monthly data on industrial production, retail sales, and fixed asset investment, which will be closely monitored by investors. The year-on-year improvement in the data is not expected to surprise, given the stagnant economy during the lockdown. However, concerns have arisen due to recent poor import, producer price index (PPI), and loan data, making China’s growth a focal point for market movements.
Throughout the week, several Federal Reserve officials are scheduled to deliver speeches, with Chair Jerome Powell set to speak on Friday. Their comments could generate significant market attention and potentially impact market expectations.
Currently, traders believe there is a 17.7% chance that the Fed will maintain interest rates, up from 8.5% the previous week. This shift follows a report on Friday showing a rise in long-term inflation expectations, which reached their highest level since 2011 and led to increased dollar strength and Treasury yields.
While expectations for as many as three quarter-point rate cuts by the end of the year persist, recent consumer price index (CPI) and PPI data have supported the case for the Fed to pause due to slowing inflation. However, Fed Governor Michelle Bowman mentioned on Friday that the central bank may need to raise interest rates further if inflation remains high.
John Briggs, global head of economics at NatWest Markets, noted that while the directional bias favors a rate cut as the next move rather than a hike, a softening in global growth or a significant deterioration would likely be necessary to meet the current market pricing or fuel further dovish repricing.
Investors’ concerns about growth, coupled with worries over the U.S. debt ceiling and lingering banking issues, have bolstered the safe-haven status of the dollar. The dollar hovered around five-week highs against major currencies on Monday, extending its best weekly rise since September. It was last trading at 102.64, following a 1.4% surge last week.
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