Asian markets rise on expectations of US rate cut

Political developments in France added to market uncertainty

Asian stocks edged higher on Monday as investor optimism grew over a potential interest rate cut by the US Federal Reserve in September, while political developments in France added to market uncertainty, according to Reuters.

In a surprising turn of events in France, a leftist alliance secured the top position ahead of the far-right party, thwarting Marine Le Pen’s National Rally (RN) from gaining significant political ground. This outcome, though unexpected, relieved investors, who had concerns over potential policy reversals affecting President Emmanuel Macron’s pro-market reforms.

Holger Schmiedling, chief economist at Berenberg, commented on the political landscape: “Forming a government in France will be challenging. The likely scenario now points to some form of coalition between leftist parties and Macron, potentially leading to policy adjustments rather than further reforms. The outcome, although less than ideal, averts more severe scenarios.”

The euro reacted modestly to these developments, slipping slightly to $1.0825 after reaching $1.0843 on Friday following a weaker-than-expected US jobs report that softened the dollar.

Equity markets in Asia-Pacific, excluding Japan, saw a marginal increase of 0.1%, after touching a two-year peak last week. Meanwhile, Japan’s Nikkei index held steady near record highs.

US futures indicated a slight dip for both the S&P 500 and Nasdaq, with earnings season kicking off later in the week featuring reports from Citigroup, JP Morgan, and Wells Fargo.

Investors interpreted Friday’s jobs report as bolstering the case for a Fed rate cut in September, with futures now implying a 77% probability of such a move. Market expectations have priced in approximately 53 basis points of easing by year-end, up from about 40 basis points a month earlier.

Treasuries rallied following the jobs report, with 10-year yields declining to 4.297% from highs near 4.493% earlier in the week.

Federal Reserve Chair Jerome Powell is scheduled to present the central bank’s outlook before Congress on Tuesday and Wednesday, with other Fed officials also set to speak throughout the week.

Looking ahead, Thursday will bring the US consumer price report, where headline inflation is anticipated to ease to 3.1% from 3.3%, while core inflation is expected to remain steady at 3.4%. Concurrently, Germany will release its inflation data, and China will unveil consumer prices and trade figures.

In commodities, gold held near one-month highs at $2,385 per ounce, buoyed by market uncertainty. Oil prices also saw gains due to robust summer fuel demand and potential supply disruptions from hurricanes in the Gulf of Mexico. Brent crude rose by 22 cents to $86.76 per barrel, while US crude edged up 2 cents to $83.18 per barrel.

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