Asian stocks are set to fall into a week that includes measures of inflation that will help guide bets on the outlook for global interest rates. The yen was steady after Japan’s top currency official ratcheted intervention rhetoric.
Equity futures in Australia, Japan and Hong Kong point to early losses when markets open on Monday. Contracts for US shares were steady in early Asian trading after the S&P 500 slipped on Friday amid a large options expiry
The moves come as markets are at a critical juncture for positioning into the second half of 2024 with the outlook for central bank policy rates from New Zealand to Japan and the US unclear. Inflation prints in Australia and Tokyo as well as the Federal Reserve’s preferred gauge of consumer costs may help, after data showed US services activity picked up to the fastest pace in more than two years.
The greenback was little changed in early Asian trading while the Japanese yen was below 160 per dollar as Masato Kanda said officials are ready to intervene to support the currency 24-hours a day if needed. Traders have been wary of an escalation in official rhetoric after the yen’s 1.6% slide this month, while retail investors appear to be reloading bets for a rebound.
“The yen finished higher last week at 159.80 versus the dollar, supported by Friday night’s stronger-than-expected US PMI data and the BOJ’s reluctance to provide a “detailed plan” around its reduction of bond purchases,” writes Tony Sycamore, market analyst at IG Australia in Sydney. “We suspect the next round of intervention is likely to come after yen triggers buy orders perched above the late April 160.20ish high”
This week, while parsing inflation data, traders will also be keeping watch on rising political risks. The first UK prime ministerial and US presidential debates are scheduled and the first round of voting in the French legislative election is set to take place this coming weekend.
“While the debate may not stoke market volatility, it will be symbolic given it’s the earliest live US debate since 1960, and Biden will be out to prove a point to the American voters,” said Chris Weston, head of research at Pepperstone Group in Melbourne. “As the gloves come off it could get ugly on the podium, and we watch to see if the debate affects polling.”
Treasury 10-year yields closed little changed at 4.26% on Friday after the S&P Global’s June preliminary US manufacturing and services PMIs beat estimates. The stronger data unwound an earlier rally in Treasuries following softer European PMI data. France’s risk premium over Germany closed at the highest since 2012.
Triple Witching
The S&P 500 fell 0.2% on Friday as an estimated that $5.5 trillion of options expired during the quarterly event ominously known as “triple witching.” Nearly 18 billion shares changed hands on US exchanges more than 55% above the three-month average. Nvidia Corp. played an added role, with the value of contracts tied to the chipmaker the second-largest of any underlying asset, lagging only the S&P 500.
Traders and strategists are beginning question how long this year’s rally can persist as bond and currency markets gyrate from shifting bets on central bank rate cuts and election uncertainty in Europe. A gauge of global equities has climbed 2.3% this quarter, set for a third straight quarterly gain while US stocks have notched fresh highs this month amid the AI frenzy.
At a stock level, a correction is already starting to play out as market breadth is extremely weak with momentum for a few shares continuing almost unabated, according to Morgan Stanley. That may remain into the second half however until there’s a change in the macro outlook, such as inflation signaling the need for a rate hike or growth materially slows, Michael Wilson, chief US stock strategist wrote in a note to clients on Sunday.
“Until the bond market pushes back via a higher term premium, or growth slows down in a more meaningful way, we expect this narrow market performance to persist,” he wrote.
Elsewhere in Asia, investors of Chinese assets sold off again last week as policymakers showed no urgency to roll out more stimulus. The yuan slid to its lowest in seven months, and the benchmark Shanghai composite index fell below the 3,000 level on Friday for the first time since March. A gauge of Asian currencies versus the dollar is nearing its lowest since November 2022.
Meanwhile, China and the European Union have agreed to start talks on the bloc’s plans to impose tariffs on electric vehicles imported from the Asian nation.
In commodities, oil extended Friday’s decline toward USD80 a barrel amid a stronger greenback and a technical indicator suggesting the recent rally has gone too far. Gold fell amid a re-think of the Fed’s rate cut outlook. – Bloomberg
