Sydney, May 30 (BUS): Asian stocks followed Wall Street higher on Monday while the dollar was constrained near five-week lows as investors bet on an eventual slowdown in US monetary tightening, albeit after sharp gains in June and July.
Helping to calm the mood, Reuters reported that Shanghai authorities will cancel several conditions for companies to resume work from Wednesday, easing the citywide shutdown that began two months ago.
The Memorial Day holiday in the US left only a limited impression on demand at the end of the month, and MSCI’s broadest index of Asia Pacific shares outside Japan rose 1.9% to a three-week high.
Japan’s Nikkei rose 2.2% and South Korea’s rose 1.2%. China’s blue chip stocks rose 0.7%.
Nasdaq futures added another 1.1%, after gaining 6.8% last week, while S&P 500 futures rose 0.6%, after rising 6.6% last week in their best week so far this year.
EUROSTOXX 50 futures are up 0.6%, FTSE futures are up 0.2%.
Investors have taken advantage of the Federal Reserve’s hints that, once it rises strongly over the next two months, it may slow its tightening.
“Hopes, naive or otherwise, of a pause in the Fed’s tightening cycle as early as September continue to reverberate,” said Ray Atrell, head of FX strategy at National Australia Bank. “Money markets have lowered their rates for additional Fed rate increases by the end of 2022 from 193 basis points to 180 basis points.”
“Although this still points to a rate increase at every remaining 2022 Fed meeting, including increases of 50 basis points in both June and July and at least 25 basis points at each of the remaining three meetings.”
The chance of a less hawkish Fed was enough to see Treasuries rebound, with 10-year Treasury yields above a six-week low of 2.74%. This is down from a peak of 3.203% on May 9.
The stable market mood saw the safe-haven dollar and yen drop, while the euro was boosted by hawkish comments from European Central Bank officials who were raising interest rates early in July.
“US economic data appears to be slowing, ECB officials are discussing even faster initial interest rate hikes, and interest rate differentials are starting to move in favor of the euro,” noted Goldman Sachs analyst Zach Bandel.
“The sharp slowdown in the US economy – if not matched by similar weakness in Europe – could lead to a real recovery for the euro, although the opposite is also true if US data holds up better than expected,” Bundel added. “We see downside risks to growth in the US and have recommended short USD/JPY options to express that view.”
This underscores the importance of key US data released this week which includes the ISM manufacturing survey on Wednesday and the jobs report for May on Friday.
Payrolls are expected to rise by 320,000, although that will be lower than in April, with unemployment at 3.5%.
The euro settled at $1.0758 on Monday, after rising 1.6% last week to $1.0764.
The dollar index settled at 101.50, after losing 1.3% last week to hit a five-week low of 101.43.
The dollar was weaker against the yen at 126.98, but still has strong support around 126.37.
The dollar’s decline helped gold to break away from its recent lows and the metal was trading at $1,862 an ounce.
Oil prices were supported by expectations of increased demand with the start of the US driving season.
Brent crude rose 80 cents to $120.23, while US crude rose $1.07 to $116.14 a barrel.