Asian equity markets exhibited little movement on Tuesday, while the dollar and yen strengthened against their global counterparts. This defensive shift in the forex markets comes as investors brace for upcoming US economic data that could provide insights into the Federal Reserve’s potential rate adjustments.
In regional stock movements, equities in Australia, Hong Kong, and South Korea experienced declines, while shares in mainland China saw mixed results. Japanese stocks, although initially showing gains, ended the session mostly flat. Despite this, the yen saw a notable rise, reversing its previous weakening trend. An index tracking global shares receded after an early uptick.
European equity futures showed minimal change, and US futures dipped as Wall Street prepared to reopen following the Labor Day holiday. Treasury yields remained relatively stable.
The dollar index surged to a two-week high, marking its fifth consecutive day of gains. The yen’s recent appreciation ended a four-day period of decline against the greenback.
Pimco Japan Ltd. anticipates that the Bank of Japan might raise interest rates as early as January. However, according to Julius Baer, such hikes might not necessarily lead to a stronger yen. Mark Matthews, head of Asia research at Bloomberg Television, noted that despite potential rate increases, a significant interest rate differential of 400 basis points compared to the US might continue to pressure the yen.
In South Korea, the won depreciated following August inflation data, which revealed the slowest annual price increase since 2021. The Australian dollar also fell, influenced by a drop in iron ore prices.
Investors are focusing on US manufacturing data due later today, which could offer clues about the strength of the US economy. This comes amidst a week packed with economic reports, culminating in Friday’s nonfarm payrolls data. The market is anticipating a potential beginning to the US rate-cutting cycle, with a one-in-four chance of a 50 basis-point reduction this month, as per Bloomberg data.
Valentin Marinov, head of G-10 FX strategy at Credit Agricole CIB, cautioned on Bloomberg Television that markets might be overly optimistic about the Fed’s September meeting. “The dollar could regain strength once investors realize that the Fed may adopt a more cautious approach,” he said.
JPMorgan Chase & Co. strategists warned that a rate cut might not boost equity markets significantly if it reflects ongoing economic slowdown. Mislav Matejka, who led the analysis, advised maintaining a defensive stance amid current market conditions. He noted that sentiment indicators and geopolitical uncertainties could weigh on market performance, despite the bond yield pullback.
In China, the economic slowdown remains a concern, with data showing continued contraction in factory activity for August. This has spurred calls for new government stimulus as inventory levels of critical raw materials like steel and soybeans continue to rise, signaling sluggish economic activity.
Looking ahead, Lorraine Tan, director of Asia equity research at Morningstar, expressed cautious optimism, suggesting that a stabilization in Chinese housing demand next year could serve as a pivotal moment for market confidence.
In the commodities sector, oil prices inched up following Libya’s declaration of force majeure on a key oil field, contributing to a significant reduction in global daily supplies.
Additionally, the US is preparing to impose new sanctions on Venezuelan officials in response to Nicolás Maduro’s controversial reelection and recent arrests of opposition figures, escalating tensions surrounding the Venezuelan government’s crackdown on dissent.
