Asian shares saw a boost on Monday as investors prepared for a week filled with earnings reports and key central bank meetings, which could lead to easing measures in the United States and the United Kingdom, while Japan may raise borrowing costs, signaling a move towards economic “normality.”
This week will also bring the U.S. jobs report for July, important surveys on U.S. and global manufacturing, and data on Eurozone GDP and inflation.
The U.S. Treasury is set to announce its bond issuance plans for the quarter, and China’s politburo meeting might unveil further stimulus measures following unexpected rate cuts last week.
With a favorable June inflation report, markets are betting that the Federal Reserve will hint at a potential rate cut in September during its policy meeting on Wednesday. Futures markets are already pricing in a quarter-point rate cut, with a 12% chance of a 50 basis point cut, and 68 basis points of easing expected by Christmas.
Goldman Sachs analysts noted, “The FOMC is likely to hold rates steady but may adjust its statement to suggest a higher likelihood of a rate cut in September. We see the risks to the Fed’s path as leaning slightly towards more cuts than our baseline of quarterly reductions, though not to the extent that market pricing suggests.”
The Bank of Japan also has a meeting on Wednesday, with market expectations indicating a 70% chance of a 10 basis point rate hike to 0.2%, and some possibility of a 15 basis point increase.
Investors are less certain about the Bank of England’s actions at its Thursday meeting, with futures showing a 51% probability of a cut to 5%.
The potential for higher borrowing costs in Japan affected the Nikkei, which dropped 6% last week as the yen strengthened. However, the index rebounded by 2.2% early Monday, following positive performance on Wall Street.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4%, after a 2% loss last week. S&P 500 futures added 0.4%, while Nasdaq futures increased by 0.6%.
About 40% of the S&P 500 by market value will report earnings this week, including major tech companies such as Microsoft, Apple, Amazon, and Facebook-parent Meta Platforms. High expectations mean any disappointment could impact the valuations of these mega-cap stocks.
“With significant moves implied by the options market for individual stocks on reporting day, movement at the stock level could affect other plays within their sector and potentially increase volatility,” said Chris Weston, head of research at broker Pepperstone. “Company earnings don’t come much bigger than Microsoft, where the options market implies a move (higher or lower) of 4.7% – the after-market session on Tuesday could get lively.”
In currency markets, the Japanese yen slightly retreated, with the dollar rising to 154.15 yen from last week’s low of 151.93. The euro remained steady at $1.0855, finding support around $1.0825 last week.
In commodities, gold increased by 0.5% to $2,398 an ounce, bolstered by expectations of a dovish Fed. Oil prices also edged up after a 1% decline last week due to concerns about Chinese demand. Brent crude gained 20 cents to $81.33 a barrel, while U.S. crude rose by 6 cents to $77.22 per barrel.
