Asian and European stock markets rose Tuesday in anticipation of a potential U.S. Federal Reserve interest rate cut.
Investors are increasingly betting on a significant reduction, possibly up to 50 basis points, which has bolstered optimism in global markets. In Asia, most markets saw gains, with currencies like the Malaysian ringgit and Indonesian rupiah rising against a weaker dollar.
However, Japan’s Nikkei faced losses due to the yen’s strength, which impacted exporters.
In Europe, stocks climbed as data suggested the Federal Reserve was making progress in its inflation battle, adding to hopes for the rate cut.
Bets on the Federal Reserve slashing borrowing costs by as much as half a percentage point have jumped in recent days, with observers suggesting officials want to front-load an expected series of reductions.
That has weighed on the dollar, which sank below 140 yen on Monday for the first time since summer 2023 and also weakened against its other major peers.
A string of data in the past few months has indicated that US inflation is easing back to the Fed’s two-percent target, while the labour market is slowing, giving decision-makers room to loosen monetary policy.
Fed boss Jerome Powell has already suggested officials will begin cutting, but debate has focused on whether they will go for 25 basis points or 50, with some warning that the bigger option could signal there is some concern about the economy.
Successive big misses on job creation in July and August fanned fears of a recession, though policymakers have looked to temper that talk.
Independent analyst Stephen Innes said: “The labour market and inflation data haven’t exactly screamed for a massive cut, but that hasn’t stopped the market from placing its bets.
“With a 50-basis-point cut looking like a sure thing, disappointment could be on the horizon if the Fed pulls back with a mere 25 basis points.
“The first cut is just the appetiser, though — the main course comes with Jay Powell’s press conference and the Fed’s dot plot, which will likely set the pace for the rest of the year,” he added, referring to the bank’s guidance on rates.
ACY Securities currency analyst Luca Santos said a 50-point cut could see the yen trade in the 130-140 range, adding that “volatility in the forex market highlights the sensitivity of investors to economic signals, particularly those related to monetary policy shifts”.
The strengthening yen — which is up around 13 percent from the four-decade low hit in July — hit the Nikkei 225 in Tokyo.
The index fell one percent as traders returned from a long weekend.
However, optimism for a big Fed cut boosted most other Asian markets, with Hong Kong, Sydney, Singapore, Manila, Mumbai, Bangkok and Jakarta all up.
London rose in the morning, a day before key British inflation data and ahead of the Bank of England’s latest decision on borrowing costs due Thursday.
Paris and Frankfurt also advanced.
Shanghai, Seoul and Taipei were closed for holidays
With the Fed seen as certain to cut rates Wednesday for the first time since 2020, investors are keenly awaiting the Bank of Japan’s policy decision on Friday after it hiked twice this year, which were the first increases in 17 years.
Officials in Tokyo are forecast to stand pat but a surprise move in July sparked turmoil in global markets and led to the massive unwinding of so-called yen carry trades in which investors use the cheap currency to buy high-yielding assets such as stocks.
Analysts at Asymmetric Advisors said they “don’t think BoJ will hike rates again in the very near term given weakening overseas demand and the recent yen’s strength, which has relieved some pressure on Japan’s central bank to act”.
However, they added that “we do see more room for yen’s appreciation as the pressure is now mounting on the US Federal Reserve to ease its monetary policy more aggressively to support the US economy”.
– Key figures around 0810 GMT –
Tokyo – Nikkei 225: DOWN 1.0 percent at 36,203.22 (close)
Hong Kong – Hang Seng Index: UP 1.4 percent at 17,660.02 (close)
London – FTSE 100: UP 0.8 percent at 8,342.05
Shanghai – Composite: Closed for a holiday
Dollar/yen: DOWN at 140.60 yen from 140.63 yen on Monday
Euro/dollar: UP at $1.1137 from $1.1131
Pound/dollar: UP at $1.3218 from $1.3216
Euro/pound: UP at 84.25 pence from 84.22 pence
West Texas Intermediate: UP 0.3 percent at $70.27 per barrel
Brent North Sea Crude: UP 0.1 percent at $72.80 per barrel
