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Asian Shares Rally as China Implements Market Support Measures

On May 2, 2023, a man walked past a brokerage in Tokyo, Japan, where an electric monitor displayed the Nikkei share average and the Japanese yen exchange rate against the U.S. dollar. This scene came amid positive news for Asian stock markets, with China’s blue chips bouncing back due to new market support measures implemented by the Chinese government. As a result, the Nikkei in Japan rose 1.5%, and S&P 500 futures saw a modest increase of 0.1%. The strength of the U.S. dollar against the yen was also maintained, supported by high two-year yields.

Amidst this market optimism, investors remained cautious as they awaited crucial readings on U.S. jobs and inflation, which could potentially influence the need for interest rates to rise again. The upcoming release of U.S. payrolls data, EU inflation figures, and China’s PMI data this week would play a significant role in shaping market sentiments.

The market sentiment received a boost when China announced new measures to support its struggling markets. Over the weekend, Beijing revealed its plan to halve the stamp duty on stock trading, in addition to previous efforts to support the housing sector. China’s securities regulator also granted approval for the launch of 37 retail funds. These remedial actions were deemed necessary as China’s industrial firms saw a 6.7% decline in profits in July, marking the seventh consecutive month of downturn. Investors eagerly welcomed any measures that could alleviate the ongoing challenges, leading to a 1.5% increase in Chinese blue chips, helping them recover from their lowest point this year.

All eyes are now focused on the release of China’s official PMI data for August, scheduled for Thursday, which is expected to indicate continued economic weakness. Analysts at Nomura commented that while the new support measures align with the directive from the July Politburo meeting, they believe these measures do not represent a substantial increase in policy support for reviving the real economy.

The positive sentiment extended beyond China, as MSCI’s broadest index of Asia-Pacific shares outside Japan climbed by 1.0%, breaking a three-week losing streak with minor gains last week. Japan’s Nikkei also saw a rise of 1.6%, supported in part by the yen’s persistent weakness.

The improvement in risk sentiment was reflected in the European markets as well. EUROSTOXX 50 futures witnessed an increase of 0.7%, while S&P 500 futures and Nasdaq futures both edged up by 0.1%, building on last week’s modest gains.

With respect to the Federal Reserve’s monetary policy outlook, the market responded calmly to Federal Reserve Chair Jerome Powell’s slightly hawkish stance, where he reiterated the possibility of future rate hikes but emphasized a careful approach. Analysts at Goldman Sachs took this statement to mean that the Federal Open Market Committee (FOMC) does not intend to raise rates at the September meeting. They continue to anticipate that further policy tightening may not be necessary, making the July FOMC meeting’s rate hike the last of the cycle. Futures currently imply an approximately 80% chance of a steady outcome at the September 20 meeting, but there is a 58% probability of a rate hike by the end of the year.

The path forward for interest rates will largely depend on the upcoming U.S. economic data. Recent manufacturing surveys indicating a slowdown in both domestic and global economies have raised concerns. This week’s ISM survey on manufacturing, along with reports on payrolls, core inflation, and consumer spending, will be closely watched. Median forecasts anticipate a 170,000 increase in payrolls for August, with a steady jobless rate of 3.5%. However, analysts at JPMorgan caution that job gains could be hindered by the ongoing entertainment industry strike in Hollywood, and they predict a more modest increase of just 125,000.

Additionally, figures on EU inflation this week could play a crucial role in determining whether the European Central Bank (ECB) will opt for another rate hike next month. The current market is divided on the possibility of a further increase from the current rate of 3.75%, with ECB President Christine Lagarde emphasizing the need for restrictive policies in her recent statements. Bank of England Deputy Governor Ben Broadbent echoed this sentiment, suggesting that rates may need to remain high “for some time yet.” However, Bank of Japan Governor Kazuo Ueda reiterated the necessity of maintaining super loose monetary policy, highlighting a divergence in global central bank strategies.

This divergence in monetary policies has put pressure on the yen, perpetuating the dollar’s firm position. Early Monday, the dollar stood at 146.40 yen, narrowly missing Friday’s nearly 10-month high of 146.64 yen. The euro, on the other hand, remained strong against the yen, reaching its highest level since October last year at 158.20 yen. However, the euro struggled against the dollar, which gained broad support from higher Treasury yields, and the euro stood at $1.0808, experiencing its sixth consecutive weekly decline.

High yields and a strong dollar have posed challenges for gold prices, which settled at $1,915 per ounce. While there was some support for oil prices from a significant rise in U.S. diesel prices, concerns about Chinese demand continue to affect market dynamics. As a result, Brent crude increased by merely 1 cent to $84.49 per barrel, while U.S. crude rose by 6 cents to $79.89 per barrel.

In summary, the Asian stock markets experienced a rally as China implemented new measures to support its struggling markets. Despite cautious sentiments driven by upcoming U.S. job and inflation data, investors welcomed any support to counter the economic challenges. The market is closely watching China’s PMI data, which is expected to reflect ongoing weakness. Meanwhile, the European markets also demonstrated positive sentiment, with futures pointing to further gains. The U.S. data releases and EU inflation figures will likely influence interest rate decisions for both the Federal Reserve and the European Central Bank. The divergence in global central bank policies puts pressure on the yen, while the dollar remains firm. Gold prices face headwinds due to high yields and a strong dollar, and oil prices find support from U.S. diesel prices, despite concerns about Chinese demand.

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