Asian shares showed mixed performance in early trading, reflecting a subdued risk appetite as investors weighed the likelihood of the US Federal Reserve adopting a less aggressive approach to interest rate cuts. The regional markets displayed hesitancy, with stocks in Japan and South Korea moving between gains and losses, while Australian equities edged slightly higher. Meanwhile, futures in Hong Kong pointed to possible gains. In the US, stock contracts remained flat after the S&P 500 finished almost unchanged in the previous session.
The overarching sentiment in the markets stems from uncertainty about future Federal Reserve actions. Wall Street investors are beginning to temper expectations for swift rate cuts, even as the US economy remains resilient. With Federal Reserve officials signaling a cautious stance toward reducing rates, and potential fiscal deficits looming after the upcoming presidential election, traders have been re-evaluating their forecasts. Since last week, expectations for Federal Reserve rate cuts through September 2025 have been reduced by more than 10 basis points.
The upcoming US presidential election is emerging as a key factor influencing market sentiment. According to Tony Sycamore, a market analyst at IG Australia, the recent rise in US bond yields can be attributed to the increasing probability of a Trump victory in the election, which could lead to higher inflation and increased fiscal spending. “Equities are unlikely to respond well if yields continue to climb in the coming sessions,” Sycamore noted. The prospect of higher government spending under a Trump administration, coupled with concerns over inflation, has led to increased volatility in the bond markets.
Wall Street’s performance this year has been largely driven by a combination of factors, including a strong economy, robust corporate earnings, and excitement surrounding advancements in artificial intelligence (AI). The S&P 500 has surged over 20% in 2023, reflecting investor optimism. However, the stock market’s upward trajectory has been interrupted by several risks. These include uncertainty over the Federal Reserve’s future rate cuts, political risks associated with the US election, geopolitical tensions in the Middle East, and the ongoing war in Ukraine.
Despite the prevailing resilience of the US economy, many analysts, including those at UBS Global Wealth Management, believe that the Federal Reserve will still need to ease rates, albeit at a slower pace. Solita Marcelli, the Chief Investment Officer at UBS Global Wealth, noted that while the US economy has fared better than anticipated, disinflationary trends persist, and there are still risks to the labor market, though they are less pronounced than before. Marcelli added, “We continue to expect a further 50 basis points of rate cuts in 2024 and 100 basis points of cuts in 2025. This should bring Treasury yields lower.”
In its most recent policy meeting, the Federal Reserve took a step toward rate cuts for the first time since the pandemic began, reducing its benchmark rate by half a percentage point to a range of 4.75% to 5%. This decision was motivated by concerns over a softening labor market and a cooling of inflation, which is now approaching the Fed’s 2% target. However, with economic data showing continued strength, the Fed is expected to take a more measured approach to future rate reductions.
Currency markets remained relatively stable amid the uncertainty over Federal Reserve policy. In Asia, the US dollar held steady, while the euro hit its lowest level since August as traders speculated that the European Central Bank (ECB) might continue lowering rates. The Japanese yen weakened, falling 0.3% to 151.47 per dollar, as traders bet that Japan’s central bank would maintain a more accommodative monetary policy for the time being.
The International Monetary Fund (IMF) also weighed in on the global economic outlook, lowering its growth forecast for 2024. The IMF highlighted the risks posed by geopolitical conflicts, including wars in the Middle East and Ukraine, as well as rising trade protectionism. However, the IMF acknowledged that central banks, particularly the US Federal Reserve, had successfully managed to control inflation without triggering widespread recessions.
In Japan, the 40-year government bond yield reached its highest level in 16 years, driven by speculation that the Bank of Japan (BoJ) may soon raise interest rates. This rise reflects growing confidence that Japan’s central bank, which has maintained ultra-low interest rates for years, could adopt a more hawkish stance as inflationary pressures build.
On the corporate front, Tokyo Metro Co. made a notable debut in Japan’s stock market, with shares surging 36% in their initial public offering (IPO). The company raised 348.6 billion yen ($2.3 billion) in Japan’s largest IPO since SoftBank Corp.’s listing in 2018, signaling continued investor interest in Japan’s public transportation sector.
In the commodities market, oil prices fell after the American Petroleum Institute (API) reported a rise in US crude inventories. West Texas Intermediate (WTI) crude declined 0.4%, settling at $71.42 per barrel. The oil market remains on edge, with concerns over a potential ceasefire in the Middle East. The Biden administration has been actively pushing for a ceasefire between Israel and Hamas, which could ease supply disruptions in the region.
Meanwhile, gold prices were little changed, holding near a recent high. Gold has seen increased interest as a safe-haven asset amid the geopolitical tensions in the Middle East and uncertainty surrounding the global economic outlook. Investors continue to seek refuge in gold, especially as inflation concerns linger and geopolitical risks remain elevated.
The cryptocurrency market saw a slight decline, with Bitcoin dropping 0.5% to $67,183.12 and Ether down 0.6% to $2,617.34. However, options traders are becoming increasingly bullish on Bitcoin, with bets rising that the cryptocurrency will reach $80,000 by the end of November. This optimism persists regardless of the outcome of the US election, suggesting that traders are banking on the broader acceptance and potential of digital assets.
This week is packed with key corporate earnings and economic data that could sway markets. Major companies such as Boeing, Tesla, and Deutsche Bank are set to report earnings on Wednesday, while UPS and Barclays are scheduled for Thursday. These reports will provide further insights into the health of various sectors, particularly aerospace, electric vehicles, and banking.
Additionally, important economic data from the US is due throughout the week, including existing home sales, new home sales, jobless claims, and the Federal Reserve’s Beige Book, which offers a snapshot of the US economy. Markets will also keep a close eye on US durable goods orders and consumer sentiment from the University of Michigan, both due on Friday.
In stock markets, S&P 500 futures fell by 0.1% in early trading, while Japan’s Topix rose 0.3%. Hang Seng futures showed promise with a 0.6% increase, while Australia’s S&P/ASX 200 edged up 0.2%. However, Euro Stoxx 50 futures dipped 0.1%, suggesting a mixed outlook for European markets.
Currency markets saw the euro and dollar largely unchanged, with the euro trading at $1.0795. The Japanese yen continued its decline against the dollar, while the offshore yuan weakened by 0.1%. The Australian dollar also fell slightly, losing 0.2% to $0.6670.
In the bond market, the yield on 10-year US Treasuries remained steady at 4.22%, while Australia’s 10-year yield rose by one basis point to 4.44%.
Global markets are grappling with a mix of optimism and concern as investors assess the trajectory of interest rate cuts, the impact of geopolitical risks, and the outcome of the US presidential election. With the Federal Reserve signaling a slower pace of rate reductions and the global economy facing challenges from inflation, fiscal deficits, and geopolitical conflicts, markets are likely to remain volatile in the coming months.
As traders continue to navigate these uncertain waters, all eyes will be on key economic data and corporate earnings reports this week, which could provide much-needed clarity on the direction of the global economy and the financial markets.
