Sydney, Jan. 31 (BNA): Asian stocks rose on Monday as Wall Street futures settled, although tests loom as UK interest rates are expected to rise this week and higher oil prices heighten concerns about inflation.
Data released on Sunday showed factory activity in China slowed in January with a resurgence of COVID-19 cases and severe shutdowns affecting production and demand.
The standoff over Ukraine remains a thorn in the market’s side, with fears that the Russian invasion could also cut off vital gas supplies to Western Europe.
The Lunar New Year holiday offered weak conditions, and the broadest MSCI Asia-Pacific stock index outside Japan rose 0.6% in slow trade.
Japan’s Nikkei rebounded 1.3% from 14-month lows, although domestic data on industrial production and retail sales missed expectations.
S&P 500 and Nasdaq futures recouped early losses to rise 0.3%, while EUROSTOXX 50 futures rose 1.2% and FTSE futures rose 0.6%.
The Bank of England is likely to raise interest rates again this week, to continue the global trend towards tightening policy. The European Central Bank also meets but is expected to stick to its argument that inflation will subside over time, Reuters reports.
Markets have shifted pricing in five Fed hikes this year to 1.25%, although investors still see rates peaking at 1.75-2.0%.
Analysts at Bank of America think this is not tough enough.
“We point out that markets cut the Fed rates at the start of the last two climbing cycles, and we think that will be the case again,” says Ethan Harris, chief economist at Bank of America.
“Starting in March, we expect the Fed to begin raising rates by 25 basis points at each remaining meeting this year for a total of seven hikes, with four more next year,” he adds. “This will raise the final interest rate to 2.75-3.00% by the end of 2023, which should slow growth and inflation.”
Very little Fed diaries this week with only three regional chiefs scheduled to speak, but plenty of data highlighted by the Institute for Production Management’s readings on manufacturing and services, and the January jobs report.
The headline salary figure is expected to be weak due to rising coronavirus cases and bad weather. The median forecast if it rises by only 155,000, while expectations range from an increase of 385,000 to a decrease of 250,000.
“We expect non-farm payrolls to rise by just 50,000 in January and the unemployment rate to remain steady at 3.9%,” Barclays analysts said in a note.
“We see downside risks to our projections given the 8.8 million adults who were not working during the week of January 11 to care for a sick person, or were themselves sick.”
The Fed’s hawkish shift has seen US 10-year Treasury yields rise 27 basis points this month to 1.78%, making bonds relatively more attractive compared to stocks and especially developing stocks with extended valuations.
It also boosted the US dollar, which jumped 1.7% so far this month against a basket of its main rivals, to its highest level since July 2020 and is now at 97.167.
The euro fell 1.7% last week, falling to its weakest level since June 2020, and was last trading at $1.1157. The dollar made gains even against the safe-haven yen, which rose 1.3% last week to stand at 115.53 yen.
Higher yields were a heavyweight for gold, which pays no yield, and the metal fell at $1,787 an ounce, after losing 2.4% last week.
Oil prices are near their highest levels in seven years after rising for six consecutive weeks as geopolitical tensions exacerbated concerns about tight energy supplies.
Brent rose another $1.18 to $91.21 a barrel, while US crude rose $1.15 to $87.97.
HF