Tuesday saw Asian markets retreat from two-and-a-half-year highs and the US dollar strengthen in response to hawkish remarks made by Federal Reserve Chair Jerome Powell, which dashed hopes for significant interest rate reduction. However, tensions in the Middle East managed to contain risk sentiment.
While investors anticipated U.S. labor data to provide more clarity on the pace of U.S. rate cuts, oil prices remained stable and gold traded just below a record high set last week.
0.13% lower at 620.05 on Tuesday, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), opens new tab was barely above the two-and-a-half-year high of 627.66 reached on Monday. The index has increased by 17% so far this year.
The Nikkei (.N225) in Japan opened higher by 1.5% in early trade on Monday following a 4.8% decline as investors took issue with Shigeru Ishiba, who was seen as a hawkish monetary policy maker, winning the race to become prime minister.
A weaker yen, which opened trading at 144.09 per dollar, helped boost Japanese equities.
The explosive gain that has boosted Asian markets over the past week is expected to slow down as mainland China’s financial markets are closed for the remainder of the week. Tuesday is also a closing day on the Hong Seng.
As international investors are ready to place wagers on China once more, a plethora of economic stimulus measures have sent battered Chinese equities flying. The blue chip CSI300 (.CSI300), opens new tab, has risen 25% since the start of last week.
Senior market analyst at City Index Matt Simpson stated, “I think we’re in for some choppy trade until U.S. data comes to flow in,” noting that volume is low because Chinese markets are closed.
NOT RUSH
Since the U.S. central bank initiated an easing cycle last month with a 50 basis-point decrease, investor attention has been focused on the rate of reductions that the Fed will undertake.
Fed Chair Powell said on Monday that the U.S. central bank would probably continue to decrease rates by quarter percentage points going forward, as fresh data increased expectations for consumer spending and economic growth.
“This is not a committee that feels like it is in a hurry to cut rates quickly,” Powell stated.
The CME FedWatch tool indicated that as a result, traders priced in a 38% chance of a 50 bp decrease next month, down from 53% on Friday. This year, traders see an easing of 70 basis points.
The dollar was strengthened by changing expectations of rate reduction, as evidenced by the dollar index’s minor increase to 100.77. At $1.11355, the euro remained stable.
Simpson of City Index stated, “As usual, Powell is not being goaded by market pricing.” “And to say that cuts are not on a preset course should serve as a warning to USD bears, given data has generally surprised to the upside in recent weeks.”
Given the Fed’s current focus on the employment market, Tuesday’s data on job openings for August and the ISM manufacturing survey for September will be key for rate expectations and the dollar, said economist Kristina Clifton at the Commonwealth Bank of Australia.
“Dollar can remain heavy if this week’s data shows the U.S. labour market remains in reasonable shape.”
In commodities, oil prices remained steady in early trade on Tuesday as concerns that a growing Middle East conflict would hamper shipments in the major producing region were outweighed by the possibility of increased supply amid weak global demand growth.
Futures for Brent crude increased 0.11% to $71.78 per barrel. West Texas Intermediate (WTI) oil futures for the US increased by 0.07% to $68.22 a barrel.
At $2,637.56 an ounce, spot gold was up 0.11%, not far from the record high of $2,685.42 reached on Thursday. Gold had its highest quarterly performance in more than four years, rising 13% between July and September.
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