Asian stocks advanced and the yen strengthened early Monday as investors took positions in anticipation of the Federal Reserve cutting US interest rates from next month.
Shares in Australia and Korea climbed, benefitting from Chair Jerome Powell’s Jackson Hole speech, when he said the “time has come” to pivot to monetary easing. The Fed’s dovish tilt also lifted the yen against the dollar, as Asian-domiciled funds added to existing short positions on the greenback. Japanese stocks declined, while contracts for US equities were steady.
Haven buying in response to rising tensions in the Middle East was an additional driver for currencies. The region is bracing for an expanded conflagration after Israeli warplanes swooped over southern Lebanon, taking out thousands of Hezbollah missile launchers in what was called a pre-emptive strike. Oil climbed 0.7% early Monday.
The prospect of the US finally easing borrowing costs is shaping trading across financial markets. The yield on 10-year US Treasuries declined two basis points to 3.79% during Asian trading.
“It should be risk-on,” said Chamath De Silva, head of fixed income at Betashares Holdings in Sydney. “Powell has confirmed that we’ll shortly be entering an easing cycle and that the fight against inflation is done, so I expect a bit of an everything rally, stocks and bonds both performing well.”
Some Fed watchers indicated there were some devils in the details of Powell’s speech. While he acknowledged recent progress on inflation and saw the economy growing at a “solid pace”, it was his emphasis on the “cooling labor market” that got the attention of many market observers. Basically, it was seen as an indication the Fed will do whatever it can to avoid a pronounced slowdown.
“The market should be happy with this speech because it wasn’t hawkish in any way, gave the green light for 25 basis-point rate cuts — and left the door open for even larger cuts if that becomes necessary,” said Chris Zaccarelli at Independent Advisor Alliance.
Swap traders on Friday were pricing in 102 basis points of easing this year, which implies a reduction at every remaining policy meeting through December, including one jumbo 50-basis-point cut. A rally in Treasuries was led by shorter maturities on Friday, with the two-year yield breaking below 4%.
Gold was little changed on Monday after jumping as much as 1.4% in its previous session after Powell’s speech and remains within touching distance of an a fresh all-time high.
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