Stocks surged as investors shifted their attention to the Bank of Japan’s press briefing and speculated about the Federal Reserve’s potential dovish stance later in the day. Financial stocks drove the Topix index higher following the BOJ’s decision to raise interest rates to approximately 0.25%. The MSCI Asia benchmark climbed more than 1.5%, while U.S. equity futures rose on expectations that Fed Chair Jerome Powell might hint at a rate cut in September.
The day’s volatility saw markets reacting to both the BOJ’s rate hike and anticipation of the Fed’s upcoming meeting. The yen exhibited fluctuations before settling 0.2% weaker against the U.S. dollar. Treasury yields steadied after declining for four consecutive sessions, and a Bloomberg index of dollar strength fell slightly.
Homin Lee, Senior Macro Strategist at Lombard Odier, emphasized the importance of BOJ Governor Kazuo Ueda’s comments on future rate hikes and Japanese Government Bond (JGB) purchases. “With the BOJ’s recent actions, all eyes are now on the Fed, which will meet within 24 hours and the U.S. employment report scheduled for Friday,” Lee said.
Any indication from the Fed about a potential rate cut could support the yen and address concerns about the narrowing interest rate differential. Although the BOJ’s rate is still low by global standards, it is the highest since December 2008.
In other major market movements, the Australian dollar weakened, and short-term bonds saw a rally following an unexpected deceleration in core inflation, which increased expectations of a Reserve Bank of Australia rate cut. Chinese stocks rose amid speculation that Beijing might introduce additional measures to bolster its ailing economy. South Korea’s Kospi Index also advanced, driven by strong performance from Samsung Electronics, which reported its fastest profit growth since 2010.
Tim Baker, Strategist at Deutsche Bank, noted, “The decline in the AUD reflects market expectations that the RBA may align more closely with global peers on interest rates.”
In commodities, oil prices extended their gains following Hamas’s announcement that Israel had killed its political leader, escalating tensions in a key oil-producing region.
In the U.S., major technology stocks continued to decline after Microsoft’s results raised concerns about the sustainability of the AI investment boom. The Nasdaq 100 fell 1.4%, nearing a correction with a 9% drop from its all-time high. The S&P 500 decreased to around 5,435, and the Russell 2000, which tracks small-cap stocks, edged up 0.3%. Nvidia Corp. saw a significant decline of 7%, erasing $193 billion from its market capitalization.
Historical trends suggest that if the Fed begins a rate-cutting cycle, stock market performance could improve. According to CFRA, the S&P 500 has historically risen by an average of 5% a year following the first rate cut in previous hiking cycles, with small-cap stocks like those in the Russell 2000 rising by 3.2% a year later.
