Asian Shares Rally As US Rate Hike Meets Expectations, Dollar Declines

27-7-2023 (SYDNEY) Asian shares saw gains and the dollar weakened following a well-anticipated US interest rate increase, which held no major surprises. However, markets remain vigilant about upcoming interest rate decisions in Europe and Japan that may pose risks.

S&P 500 futures climbed by 0.2%, while Nasdaq futures surged by 0.5%, driven by a substantial 6.8% increase in Meta Platforms during after-hours trading. The surge was prompted by Facebook’s parent company reporting a strong rise in advertising revenue, surpassing Wall Street expectations.

In the Asian region, MSCI’s broadest index of Asia-Pacific shares outside Japan rose by 1.2%, buoyed by optimism that the US tightening cycle could be coming to an end. Meanwhile, Japan’s Nikkei remained relatively flat.

China’s blue-chip stocks increased by 0.6%, and Hong Kong’s Hang Seng index experienced a notable 1.5% gain.

The US Federal Reserve raised interest rates by a quarter-point on Wednesday, as widely predicted, and left room for the possibility of further increases. During the closely watched press conference, Chair Jerome Powell refrained from committing to a rate hike in the next meeting in September. Analysts note that a slowdown in inflation and weaker economic data may influence policymakers to consider a pause in rate hikes.

Padhraic Garvey, regional head of research, Americas, at ING, observed that Chair Powell initially adhered to the script, but later acknowledged the decline in inflation and the increase in real rates. Garvey suggested that Powell’s statements hinted at the potential for future rate cuts down the line.

The European Central Bank (ECB) is widely expected to raise interest rates for the ninth consecutive time on Thursday, as the retreat in inflation places pressure on policymakers to maintain higher rates for a longer duration.

Another significant event this week is the Bank of Japan’s meeting on Friday, where speculations of further adjustments to its ultra-loose monetary policy are circulating. A Reuters poll indicates that the majority view expects policymakers to maintain the status quo.

Post the Fed decision, markets appear to believe that tightening measures are largely complete, with futures indicating only a slim chance (about 20%) of a quarter-point increase by the central bank in September. Additionally, sizable rate cuts of 125 basis points are being priced in by the end of next year.

Following the Fed hike, Wall Street saw little change, with the Nasdaq, dominated by technology stocks, closing lower.

The US dollar continued to face pressure in Asia, declining by 0.4% against a basket of major currencies to 100.73, adding to the 0.2% drop overnight. Conversely, the yen rose by 0.5% on Thursday to 139.51 per dollar, after gaining 0.5% overnight.

The expected peaking of US rates may ease pressure on emerging market currencies and offer Asian policymakers more flexibility in easing monetary policy.

US Treasury yields remained mostly steady on Thursday, with the 10-year Treasury note yield holding at 3.8609%, following a 6 basis point drop overnight. The rate-sensitive two-year yield remained little changed at 4.8287%, having eased by 7 basis points overnight.

Elsewhere, oil prices showed strength, with Brent crude futures rising by 0.9% to reach US$83.69 per barrel, and US West Texas Intermediate crude futures increasing by 1% to US$79.59.

Gold prices edged up by 0.4% to US$1,979.47 per ounce.