Asian stocks strengthened ahead of Fed decision

Asian stocks reached a one-month high on Tuesday, buoyed by a rally on Wall Street. This surge was fueled by hopes that the Federal Reserve might signal potential rate cuts later in the week.
With the data calendar relatively light across major economies this week, all eyes are on Wednesday's release of the Fed's July meeting minutes and Chair Jerome Powell's speech at Jackson Hole on Friday for clues on the outlook for U.S. rates.

"Our assessment is that the market fallout from the weak early August U.S. data was disproportionate and in large part reflected the rapid unwind of crowded positions in some markets," said Jonas Goltermann, deputy chief markets economist at Capital Economics.

"While the risk of a recession in the U.S. has increased a little, there are few signs of a more substantial crisis brewing."

MSCI's broadest index of Asia-Pacific shares outside Japan advanced 1.18% and was set to rise more than 2% for the week, while U.S. futures extended gains following a strong overnight cash session on Wall Street.

S&P 500 futures rose 0.13%, while Nasdaq futures added 0.22%. Similarly, EUROSTOXX 50 futures gained 0.25% and FTSE futures were little changed.

Nikkei Dips on Stronger Yen

The Nikkei Index was down 0.45% on Monday, with a stronger Yen impacting demand for Nikkei Index-listed stocks.

After six weeks of yen buying, speculative traders have shifted to a bullish stance for the first time since 2021. This dramatic change—from a record 184,000 contracts short to 23,000 contracts net long—highlights the intensity of the deleveraging activity, especially given that the yen only strengthened by 6.5% in that period. The gross USD long position across eight IMM futures remained steady at approximately USD 11 billion, with the increase in yen positions counterbalanced by reductions in EUR and GBP holdings. The net long position in the MXN, a popular carry trade against the yen, was reduced by 23%.

The USD/JPY extended its losses Friday (-1.17%), declining by 0.14% to 147.330. Notable decliners included Tokyo Electron Ltd. (8035) and Fast Retailing Co. Ltd (9983), which fell by 0.88% and 0.46%, respectively. Of the 225 Nikkei components, 191 stocks fell and 22 rose, with one trading flat. The broader Topix fell 1.4% to 2,641.14, with Toyota falling 3.06%.

"The Nikkei was expected to fall this week after its sharp rally, but the yen's gain against the dollar during the session pushed that move faster," said Fumio Matsumoto, chief strategist at Okasan Securities.

"Today's move suggests that the market will remain volatile for a while."

Hang Seng And Shanghai Indexes Rise

China (SHCOMP) +0.66%. The Shanghai Composite jumped on Thursday, rebounding from six-month lows as investors digested mixed economic reports in China, data showed that retail sales rose more than anticipated in July, while industrial production missed forecasts. Fixed asset investments also fell short of expectations, the urban unemployment rate ticked higher, and new home prices declined.

Potential US rate cuts could significantly impact global economic strategies, especially for financial systems like Hong Kong's, which is tied to the US dollar. Year-to-date losses of 2.7% for the Shanghai index and 2.1% for the CSI300 highlight that, despite recent gains, there remains a cautious outlook due to ongoing economic and property market concerns. However, the resilience of China's banking sector and resource industries may help shape regional economic stability moving forward.

Expectations of a dovish Fed outcome

As markets anticipate a speech by US Federal Reserve Chair Jerome Powell at the central bank’s annual Jackson Hole meeting on Friday, where he is expected to outline a potential path for lowering rates, the yield on benchmark 10-year US Treasury bonds dropped by 0.2 basis points to 3.89%. Current financial market trading implies a roughly 76% probability of a 0.25 percentage point rate cut in September.

Expectations of a dovish Fed outcome this week left the dollar struggling at an over seven-month low against the euro, which peaked at $1.108775 on Tuesday. Federal Reserve members Mary Daly and Austan Goolsbee were out over the weekend to flag the possibility of easing in September, while minutes of the last policy meeting due this week should underline the dovish outlook.
Sterling hovered near a one-month high and last bought $1.2985. Against the yen, the greenback fell 0.23% to 146.26.

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