Asia stocks gain, bonds fall as traders consider odds of bigger Fed cut

Audio By Carbonatix

Enlarge

By Kevin Buckland

TOKYO (Reuters) – Asian stocks tracked Wall Street higher on Wednesday and safe-haven bonds fell as traders firmed up bets that U.S. labour market softness would spur the Federal Reserve to cut rates by at least a quarter point next week.

S&P 500 futures pointed 0.3% higher, while the-European STOXX 50 futures gained 0.2%.

Gold caught its breath after Tuesday’s record high while the dollar was little changed with two crucial days of U.S. inflation figures, starting later on Wednesday, ahead of the Fed’s September 17 decision.

Crude oil continued to rise after Israel’s attack on Hamas leadership in Qatar. Indeed, geopolitical worries remained front and centre of investors’ minds after Poland scrambled its own and NATO air defences to shoot down drones following a Russian air attack on western Ukraine.

Japan’s Nikkei share average added 0.8%, South Korea’s KOSPI jumped 1.7% and Taiwan’s equity benchmark climbed as much as 1.5% to hit a record high.

Hong Kong’s Hang Seng gained 1.3%, while mainland Chinese blue chips rose 0.3%.

Overnight, the S&P 500, Nasdaq Composite and the Dow Jones Industrial Average each ended the day at fresh all-time highs.

Traders see a rate cut by the Fed next Wednesday as a sure thing, and even lay 8.4% odds on a super-sized half-point reduction, the CME Group’s FedWatch Tool shows.

A week earlier, markets had assigned a 7% probability on the Fed holding rates steady, but another dismal monthly payroll number last week convinced investors the Fed had no cushion to wait any longer to support the economy.

The final hurdles to that view will come on Wednesday and Thursday, in the form of producer and consumer inflation readings, respectively.

“An upside inflation surprise could rock the boat slightly and lead to an unwinding of rate cut probabilities, not so much for September, but for subsequent months,” said Kyle Rodda, senior financial markets analyst at Capital.com.

The rapid deterioration in U.S. economic data, particularly on jobs, “is the reason why markets are pricing in such aggressive easing from the Fed – which, incidentally, the markets appear to believe will be enough to protect the U.S. economy from a recession, judging by current risk appetite,” Rodda added.

Markets took in stride a court ruling that temporarily blocked President Donald Trump from removing Federal Reserve Governor Lisa Cook, a case which is likely to end up before the Supreme Court.

Investors are keenly following the unprecedented legal battle as it could upend the central bank’s long-held independence.

U.S. Treasury bonds declined for a second day on Wednesday, pushing yields higher.

The 10-year Treasury yield added 1 basis point to 4.088%, after climbing almost 3 basis points on Tuesday.

Equivalent Japanese government bond yields rose 0.5 basis points to 1.565%, paring an earlier rise after a smooth auction of five-year debt.

Bond yields rise when prices fall.

The U.S. dollar index, which measures the currency against six rivals, eased slightly to 97.707, reversing earlier small gains.

The greenback was little changed at $1.1715 per euro, and down 0.07% at 147.31 yen.

The European Central Bank sets policy this Thursday, and is widely expected to keep rates unchanged.

A month ago, economists were split on the likelihood of further rate reductions by the ECB, but sentiment has shifted with recent data showing inflation holding close to the 2% target and unemployment at a record low.

The Bank of Japan announces its latest policy decision on Friday next week, and is universally expected to forgo a rate hike this time.

Reuters and Bloomberg published conflicting reports on Tuesday in terms of tone, with Reuters suggesting the BOJ may wait longer to tighten policy, while Bloomberg suggested policymakers are eyeing a hike this year.

Investors have also been watching politics, focusing on who will take over from Shigeru Ishiba as Japan’s next prime minister, and on the staying power of France’s newly appointed fifth prime minister in two years.

Gold rose 0.5% to $3,644 per ounce, a day after leaping to an unprecedented $3,673.95.

Brent crude futures rose 1.1% to $67.13 a barrel, while U.S. West Texas Intermediate crude futures gained 1.1% to $63.34.

Prices had settled up 0.6% in the previous trading session after Israel said it had attacked Hamas leadership in Doha, which Qatar’s prime minister said threatened to derail peace talks between Hamas and Israel.

(Reporting by Kevin Buckland; Editing by Clarence Fernandez, Shri Navaratnam and Kim Coghill)