Japanese shares led Asia higher on Tuesday, with the yen on the back foot ahead of a slew of data this week, including U.S. inflation figures, which will help investors gauge the Federal Reserve’s policy outlook after last week’s volatile markets.
Oil prices eased after a 3% jump on Monday as investors kept a wary eye on the risk of a widening conflict in the Middle East that could pinch global crude supplies. Demand for safe-haven assets lifted gold, although prices slipped a bit on Tuesday.
“Global benchmark Brent crude futures settled higher at $82.30 a barrel, gaining $2.64, or 3.3%, its biggest percentage gain for a single trading session this year. Gold prices rose to a one-week high on Monday as investors looked forward to a key inflation report that could shed more light on the U.S. central bank’s next policy move,” said Marc Pussard Head of Risk, APM Capital.
Japan’s Nikkei rose more than 3% following a holiday on Monday, providing a welcome relief after last week’s wild swings that began with a massive sell-off spurred by a rising yen and fears of a U.S. recession. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.15% to 556.55. Chinese stocks edged down while Hong Kong’s Hang Seng Index ticked up 0.1%.
“Wall Street stocks closed mixed on Monday as investors braced for a slew of U.S. economic data this week, especially consumer prices, to gauge the outlook for Federal Reserve monetary policy,” added Pussard.
European stock markets were set for a higher open, with the Eurostoxx 50 futures up 0.3% and FTSE futures 0.26% higher.
“While aftershocks might reveal vulnerabilities, we continue to view recent volatility as being an equivalent of a ‘heart palpitation’ not a ‘cardiac arrest’,” Viktor Shvets, head of global desk strategy at Macquarie Capital, said in a note. “We also maintain that the nervousness about a U.S. slowdown is overdone.”
However, investor sentiment remains fragile. The yen dropped 0.34% to 147.72 per dollar on Tuesday, having touched a seven-month high of 141.675 last Monday, a far cry from the 38-year lows of 161.96 it reached at the start of July. A Bank of Japan rate rise last month, following bouts of intervention from Tokyo earlier in July, wrong-footed investors and led them to bail out of popular carry trades, which use the currency of a low-rate market to fund investments with higher returns.
“Markets are likely to overreact to any inflation surprises due to low liquidity during the summer holidays. An upside inflation surprise could lead to reduced expectations for 100 basis points rate cuts by year-end currently priced into bond futures. Conversely, a downside surprise would solidify expectations for a 50 basis points rate cut in September and an aggressive interest rate cutting cycle ahead. Ahead of the FOMC rate decision in September, the move is more or less priced in 50/50 between either a 25 or 50 basis points rate cut,” said Saxo Bank’s Strategy Team.
The latest weekly data to August 6 showed that leveraged funds—typically hedge funds and various types of money managers—closed their positions in the yen at the quickest rate since March 2011.
