21-8-2023 (SYDNEY) Markets in Asia braced themselves on Monday, eagerly anticipating Beijing’s commitment to anticipated rate cuts, which have, until now, left investors wanting for substantial stimulus measures.
China is poised to execute a reduction in lending benchmarks of between 10 and 15 basis points on Monday. Many analysts are forecasting a significant reduction in the mortgage reference rate, designed to rekindle credit demand and bolster the beleaguered property sector.
In a recent announcement, the central bank affirmed that Beijing would orchestrate financial assistance to address local government debt issues. There have also been reports of encouragement for commercial banks to increase lending.
Nevertheless, investors are showing a preference for substantial fiscal spending over minor rate adjustments, and there is currently limited evidence of such fiscal largesse on the horizon. This cautious sentiment has left MSCI’s all-encompassing index of Asia-Pacific shares, excluding Japan, hovering around stability, following a 3.9 percent dip last week – its lowest point this year.
Japan’s Nikkei eked out a 0.2 percent gain, a modest uptick following a 3.2 percent slump the previous week.
S&P 500 futures exhibited a 0.1 percent uptick, with Nasdaq futures gaining 0.2 percent. The forthcoming earnings report from AI-favorite Nvidia on Wednesday looms as a significant evaluation of market valuations.
Analysts are expressing concerns that the market, particularly the tech sector, may have overextended itself, rendering it susceptible to a more profound downturn.
According to BofA’s latest survey of fund managers, sentiment is the least bearish it has been since February 2022. Cash levels are hovering near a two-year low, with three out of four respondents expecting either a soft landing or no landing at all for the global economy.
Goldman Sachs analysts contend that there is still room for investors to expand their equity portfolios. They wrote in a note, “The re-opening of the buy-back blackout window will provide a boost to equity demand in coming weeks although a flurry of expected equity issuance this fall may provide a partial offset.”
Stock valuations have been under pressure, partly due to a sharp surge in bond yields. The U.S. 10-year bond yield reached a ten-month high of 4.328 percent last week. Early on Monday, yields steadied at 4.253 percent, and a move above 4.338 percent would take them to levels not seen since 2007.
Market participants are assuming that Federal Reserve Chair Jerome Powell will address the surge in yields during the upcoming Jackson Hole conference, alongside the recent string of robust economic data. The Atlanta Fed’s GDP Now tracker is currently projecting an impressive 5.8 percent growth rate for this quarter.
Barclays analyst Marc Giannoni commented, “It’s an opportunity for Powell to give an updated assessment on economic conditions, which now appear stronger than anticipated and reinforce the case for additional rate hikes. Even so, we would be surprised if he provided specific guidance, with key August prints for employment, CPI, and retail sales all to come before the September meeting.”
While most polled analysts believe the Fed has completed its rate hikes, futures contracts imply approximately a 31 percent chance of one more increase by December.
The surge in yields has propelled the dollar to achieve five consecutive weeks of gains and a nine-month high against the Japanese yen at 146.56. On Monday, it was trading at 145.32, with the market wary of the potential for Japanese intervention.
The euro exhibited resilience at 157.96 yen but faced pressure from the dollar, trading at $1.0871 after losing 0.7 percent of its value last week.
The strengthening dollar and rising yields weighed on gold, which was priced at $1,888 per ounce, having touched a five-month low last week.
Oil prices halted a seven-week winning streak due to concerns about Chinese demand, which offset concerns about tight supplies. Brent crude declined by 11 cents to $84.69 per barrel, while U.S. crude edged down 1 cent to $81.25 per barrel.
Liquefied natural gas (LNG) prices remained buoyant due to the risk of a strike at Australian offshore facilities, which could impact around 10 percent of global supply.
