Asian equities surged today, joining a global rally driven by expectations that the Federal Reserve will soon embark on interest rate cuts. This optimism prompted investors to flock to riskier assets across markets.
At the opening bell, Hong Kong stocks advanced, contrasting with declines in mainland China. Japanese and Australian equity benchmarks also posted gains, while South Korean stocks held steady following a record high for US shares that propelled global markets to new peaks.
The increasing appetite for risk was bolstered by resilient US retail sales data, which fueled hopes for a soft economic landing amid expectations of Fed rate cuts. This sentiment triggered a rotation into smaller stocks, with the Russell 2000 Index marking its strongest performance since April 2020 with a 12% gain over the past five sessions.
Mitsushige Akino, president of Ichiyoshi Asset Management, noted, “Following the surge in the Russell 2000 Index in the US, small-cap stocks in Japan are poised to strengthen today.”
Overnight, Australian and Japanese yields mirrored declines in US Treasury yields. Although Treasury yields inched up slightly in Asia on Wednesday morning, the 10-year yield rose by one basis point after Tuesday’s drop. New Zealand yields also saw a modest increase alongside the kiwi, reacting to mixed inflation data that clouded the outlook for potential interest rate cuts.
Currency markets remained relatively stable, with minimal movement in the dollar and a third consecutive daily decline for the yen against the greenback early Wednesday.
Upcoming economic data in Asia includes Singapore’s export figures and a monetary policy decision in Indonesia, while markets in India and Pakistan remain closed.
According to Solita Marcelli at UBS Global Wealth Management, a significant Fed rate cut amid a soft landing scenario could pave the way for renewed earnings growth in lower quality and cyclical market segments.
Despite the positive sentiment, some economists on Wall Street caution that the Fed may be delaying its policy reversal following its recent hike to a two-decade high. The International Monetary Fund has also highlighted concerns that inflation in major economies is cooling slower than anticipated, posing risks to global growth if interest rates remain elevated for an extended period.
The buoyancy in equity markets has been supported by the belief that the economy has weathered the worst of Fed tightening. Tuesday’s robust retail sales report was viewed as a positive development, according to Bret Kenwell at eToro, who emphasized the preference for rate cuts amidst declining inflation over a rushed effort to prop up a weakening economy.
While the gains in the Russell 2000 Index are seen as bullish, analysts such as Dan Wantrobski at Janney Montgomery Scott suggest investors should brace for potential profit-taking in the coming sessions. Wantrobski added, “The longer-term outlook for the Russell shows considerable potential, with a possible return to its all-time highs as relative strength adjustments highlight further opportunities against this year’s tech sector leadership.”
In commodities trading, gold maintained its stability following a nearly 2% surge on Tuesday that saw prices reach a record high of $2,469.66 per ounce. Conversely, West Texas Intermediate oil prices declined for the fourth consecutive day.
