Global stocks traded near record highs on Monday as growing expectations of Federal Reserve interest rate cuts boosted market sentiment. The MSCI All Country World index climbed for a second consecutive session, with benchmarks in Australia and Hong Kong posting gains. This uptick followed Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium, where he hinted that the time has come to pivot toward monetary easing.
The Fed’s dovish stance also strengthened the yen against the dollar, as Asian funds increased their short positions on the greenback. However, the stronger yen contributed to declines in Japanese stocks, while futures for U.S. and European equities slipped.
The anticipation of lower U.S. borrowing costs is reverberating through financial markets, with the dollar weakening broadly and investors flocking to sovereign debt. The yield on 10-year U.S. Treasuries fell by two basis points to 3.78% on Monday.
“This is shaping up to be a risk-on environment,” said Chamath De Silva, head of fixed income at Betashares Holdings in Sydney. “Powell has effectively signaled that we’re on the verge of an easing cycle, indicating that the battle against inflation is nearing its end. I anticipate a broad rally across both stocks and bonds.”
In addition to Fed expectations, rising geopolitical tensions in the Middle East contributed to market movements. Oil prices increased by 0.7% as the region prepared for potential conflict escalation following an Israeli strike on Hezbollah targets in southern Lebanon.
The Bloomberg Asia Dollar Index reached its highest level since January, driven by gains in the Korean won and a surge in Singapore’s dollar to its strongest in nearly a decade. This was partly due to traders weighing the hawkish policy outlook of local monetary authorities against the Fed’s more dovish stance.
Powell’s speech at Jackson Hole marks a pivotal moment in the Fed’s two-year effort to curb inflation, suggesting that officials may soon cut the benchmark interest rate, which is currently at its highest level in over two decades. While the U.S. economy shows signs of cooling, there is no indication of an imminent contraction.
“My outlook is that the U.S. is heading for a soft landing, and Asian exports are performing well,” said Khoon Goh, head of Asia research at ANZ Group Holdings Ltd. “I expect a strong rally and rebound in Asian currencies as the Fed enters an easing cycle.”
Elsewhere in Asia, the People’s Bank of China (PBOC) maintained the rate on its one-year policy loans, or medium-term lending facility, at 2.3%, following a 20-basis-point cut in July. The PBOC has shifted focus away from this facility, emphasizing the seven-day reverse repurchase rate as a key policy tool. This decision highlights Beijing’s cautious approach to supporting the economy, even as China reports a rare contraction in bank loans amid sluggish demand.
China’s authorities have also initiated stress tests with financial institutions on their bond holdings to ensure they can withstand potential market volatility if a record-breaking rally reverses, according to state media reports.
In the commodities market, iron ore continued its rebound as China’s massive inventories of the material began to decline, signaling a potential end to the recent oversupply period.
Meanwhile, gold steadied near a record high after Powell’s comments reinforced expectations of rate cuts. The precious metal has surged over 20% this year, driven by hopes of Fed easing, safe-haven demand amid geopolitical risks, and strong buying from central banks and Asian consumers.
