Stocks rally on expected Fed rate cuts; euro on defensive

TOKYO (Reuters) – Asian stocks advanced on Thursday, tracking solid gains on Wall Street as data pointed to slowing economic growth in the United States, bolstering the prospect of rate cuts by the Federal Reserve as soon as this month.

People look at an electronic board showing stock information at a brokerage house in Shanghai, China July 6, 2018. REUTERS/Aly Song

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.3%, while Japan’s Nikkei .N225 and Australian benchmark were up 0.3% and 0.5%, respectively, although a U.S. public holiday kept activity somewhat subdued.

On Wall Street, which closed at midday on Wednesday for the eve of Independence Day, all three major stock indexes finished at record closing highs as expectations of Fed policy easing grew.

A report by a payrolls processor ADP showed U.S. companies added jobs in June, but fewer than what analysts had forecast, raising concerns the labor market is softening even as the current U.S. economic expansion marked a record run last month.

“Stocks and bonds rallied together as the markets were betting on interest rate cuts at the European Central Bank and the U.S. Federal Reserve,” said Noriko Miyoshi, head of fixed income at Simplex Asset Management in Tokyo.

“The pace looks too fast. Investors across the world rushed to take part in the game of yield hunting,” she said.

Global sovereign bonds rallied overnight. The 10-year Treasury note yield plunged to 1.939% US10YT=RR, a level last seen following Donald Trump’s election as president in November 2016.

Most 10-year euro zone bond yields NL10YT=RR, AT10YT=RR, ES10YT=RR, PT10YT=RR slid to record lows on Wednesday as investors bet the ECB’s dovish stance would continue, while the 10-year German Bund yield fell to minus 0.399% DE10YT=RR, flirting with the ECB’s minus 0.40 deposit rate.

European Union leaders’ nomination of Christine Lagarde, the head of the International Monetary Fund, to replace Mario Draghi as president of the ECB reinforced expectations of more monetary policy easing if it’s needed.

The 10-year Italian bond yield hit 1.599% IT10YT=RR, its lowest since October 2016 as the government eases its budget ambitions.

The market’s next focus is on Friday’s U.S. non-farm payrolls for June, which economists expect to have risen by 160,000 in June, compared with 75,000 in May.

Mainland Chinese shares drifted into negative territory amid U.S.-China trade uncertainty and a Trump comment over alleged currency manipulation, with the Shanghai Composite .SSEC down 0.2% and the blue-chip CSI 300 .CSI300 dropping 0.3%. Hong Kong’s Hang Seng .HSI edged 0.1% higher.

The U.S. Commerce Department said on Wednesday it was reviewing license requests from U.S. companies seeking to export products to China’s Huawei Technologies “under the highest national security scrutiny” since the company is still blacklisted.

Top representatives from the United States and China will meet in the coming week to continue trade talks between the world’s largest economies, White House economic adviser Larry Kudlow said on Wednesday.

In a Wednesday tweet, Trump repeated his call for the United States to match China and Europe’s “big currency manipulation game” and pumping money into their economies.

In the foreign exchange market, the euro traded at $1.1285 EUR=, near its two-week low of $1.1268 set the previous day.

The dollar was little changed at 107.76 yen JPY=, losing steam as the fall this week in U.S. bond yields.

The British pound stood at 1.2584 GBP=D4, having hit a two-week low of $1.2557 as economic data reinforced expectations that the Bank of England would join its central bank counterparts in cutting interest rates to shore up a worsening economic outlook.

In commodities, oil prices inched lower on Thursday after solid gains the day before, pressured by data showing a smaller-than-expected decline in U.S. crude stockpiles.

Front-month Brent crude futures LCOc1, the international benchmark for oil prices, were down 0.7% at $63.40 per barrel, while U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 0.6% at $56.98 per.

Gold prices were steady XAU= on Thursday after hitting a one-week high in the previous session, as gains in stock markets offset support from a weaker dollar and U.S. rate cut hopes.

Reporting by Tomo Uetake; Editing by Richard Borsuk & Kim Coghill



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