Asian stocks surged to their highest levels in 27 months on Thursday, buoyed by expectations of a potential rate cut in the U.S. following softer economic data. The optimism in markets was further bolstered by gains in bonds and commodities, while the dollar retreated.
Trading volumes remained thin due to a holiday in the United States, with investors closely watching the UK election outcomes, particularly the expected majority for the Labour Party over the Conservatives, as indicated by opinion polls.
CBA analysts noted the Labour Party’s moderate fiscal policies aimed at reducing the UK’s significant budget deficit, alongside plans to realign the country closer to the European Union.
In continental Europe, French election polls suggested that the National Rally (RN) was unlikely to secure a majority, with mainstream parties mobilizing to counter the far-right influence. FTSE futures edged up by 0.1%, while sterling held steady at $1.2740. EUROSTOXX 50 futures showed minimal movement.
In the Asia-Pacific region, MSCI’s broadest index outside Japan climbed 0.9% to its highest level since April 2022. Japan’s Nikkei rose by 0.9%, nearing its March peak, while Taiwan’s main index reached a record high, propelled by gains in the tech sector and Taiwan Semiconductor Manufacturing Co (TSMC), which surpassed T$1,000 for the first time.
Back in the U.S., S&P 500 futures and Nasdaq futures remained stable after reaching new highs, supported by weaker-than-expected economic data. The ISM measure of services activity showed a decline to its lowest since mid-2020, with employment figures notably weak ahead of the upcoming June payrolls report.
Analysts cautioned about conflicting economic indicators, noting that while the PMI survey suggested strength in services, both surveys pointed to easing inflation pressures.
The Citi U.S. economic surprise index plummeted to -47.5, its lowest since August 2022, reflecting ongoing subdued economic data. This backdrop has heightened expectations of a Federal Reserve rate cut, with markets now pricing in a 74% probability of a cut in September and anticipating a total easing of 47 basis points by year-end.
Yields on 10-year Treasuries dropped by 8 basis points to 4.355% in response to the economic outlook. The weakening economic stance of the U.S. has also weighed on the dollar, which slid across major currencies. The euro strengthened to $1.0785 from recent lows, while the dollar index hit a three-week low.
Meanwhile, the Australian dollar climbed to a six-month peak of $0.6733 on speculation that local interest rates might rise next. Conversely, the yen remained weak against other currencies as investors favored carry trades, with the dollar trading at 161.53 yen after hitting a 38-year high overnight.
Commodities benefited from the dollar’s decline, with gold rallying to $2,358 an ounce, up from $2,318 earlier in the week. Oil prices saw slight easing despite overnight gains, following a significant decline in U.S. crude stocks, signaling robust demand as the U.S. driving season commenced. Brent crude dipped 47 cents to $86.87 per barrel, while U.S. crude fell 53 cents to $83.35 per barrel.
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