Asian markets were set to close the week on a high note, with Japan’s Nikkei on pace for its best performance in over four years.
A wave of optimism from Wall Street buoyed the region’s stocks, while the dollar and U.S. Treasury yields held steady, reflecting a calmer market after recent turmoil.
This week’s relief followed a slew of U.S. economic data that eased fears of a recession in the world’s largest economy, tempering expectations for aggressive rate cuts by the Federal Reserve.
Jonas Goltermann, deputy chief markets economist at Capital Economics, noted that the market’s reaction to the weak early August U.S. data was exaggerated.
He pointed out that the turmoil largely stemmed from the rapid unwinding of crowded positions in various markets.
While the risk of a recession in the United States has increased slightly, there are few signs of a more substantial crisis brewing.
MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.3%, setting the stage for a weekly rise of over 2%.
Meanwhile, U.S. futures extended gains, with S&P 500 futures up 0.13% and Nasdaq futures adding 0.2%. EURO STOXX 50 futures rose 0.17%, though FTSE futures dipped slightly by 0.06%.
Strong U.S. retail sales data and lower-than-expected jobless claims have fueled this positive risk sentiment, following a benign inflation report that reinforced bets on imminent but measured Fed rate cuts.
Market sentiment now reflects just a 25% chance of a 50-basis-point cut by the Fed next month, down from 55% a week ago, according to the CME FedWatch tool.
David Chao, Invesco’s global market strategist for Asia Pacific ex-Japan, said the totality of data shows that disinflation is continuing, and the Fed is likely to cut rates in September by 25 basis points.
He also believes that the July inflation report diminishes the chances of a larger cut, though this was never a strong possibility.
Japan’s Nikkei surged nearly 3%, outpacing other Asian benchmarks, with Chinese blue chips ticking marginally higher and Hong Kong’s Hang Seng Index rising 2.1%.
The Nikkei is set for an impressive 8% weekly gain, marking its best performance since April 2020, a stark turnaround after last week’s heavy losses due to the unwinding of yen-funded trades.
Friday’s gains were also supported by a weaker yen, which last traded at 148.90 per dollar, near its two-week low of 149.40.
This is a significant drop from last week’s seven-month peak.
Elsewhere, the Swiss franc, which surged last week amid a flight to safety, was trading at 0.8712 to the dollar, on track to lose more than 0.6% for the week.
The euro struggled to break above $1.10 against a stronger dollar, bolstered by elevated U.S. Treasury yields.
The two-year U.S. Treasury yield hovered near its highest point in more than a week, standing at 4.0749%, while the benchmark 10-year yield steadied at 3.9035%.
In commodities, oil prices edged lower on Friday but were still set for a weekly gain, as upbeat U.S. economic data allayed fears of a recession in the world’s top oil consumer.
Brent crude futures dipped 0.35% to $80.76 per barrel, while U.S. West Texas Intermediate crude futures eased 0.5% to $77.78 per barrel.
Both benchmarks were eyeing weekly gains of more than 1%.
Spot gold slipped 0.13% to $1,913.20 an ounce, reflecting a modest dip as investors weighed the positive economic outlook against traditional safe-haven assets.
As markets stabilize, business leaders across the globe are watching closely, anticipating what these economic shifts might mean for the future.
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