Asian shares experienced a notable rebound on Monday, buoyed by the anticipation of a critical week ahead filled with significant earnings reports and central bank meetings. This week’s activities are expected to impact global financial markets profoundly, with potential adjustments in monetary policies in the United States and the United Kingdom and a possible step towards interest rate normalization in Japan.
The financial markets are gearing up for several key economic indicators and policy announcements. One of the major events is the release of the U.S. jobs report for July, which will provide insights into the labor market’s health and its implications for monetary policy. Additionally, surveys on U.S. and global manufacturing are expected, shedding light on economic activity and production trends. Eurozone GDP and inflation data are also on the horizon, offering a gauge of economic performance and price pressures in the region.
On the policy front, the U.S. Treasury is scheduled to detail its bond issuance plans for the upcoming quarter. This announcement will be closely watched for any indications of changes in fiscal policy or market impact. Concurrently, China’s politburo meeting could introduce new stimulus measures in response to the recent surprise rate cuts, aiming to support economic growth amid global uncertainties.
Market expectations for the Federal Reserve are shifting towards the possibility of a rate cut. Following a relatively benign June inflation report, there is growing anticipation that the Federal Open Market Committee (FOMC) might signal a reduction in interest rates at its upcoming meeting. Futures markets are reflecting this sentiment, with a quarter-point cut fully priced in and a 12% chance of a 50 basis point reduction. Additionally, there is an expectation of 68 basis points of easing by the end of the year. Analysts from Goldman Sachs predict that while the FOMC will likely maintain current rates at its next meeting, it may revise its statement to indicate a higher likelihood of a rate cut in September. They note that while the risks of further rate cuts are slightly tilted compared to previous expectations, the market’s extreme pricing may not fully align with the Fed’s actual trajectory.
In Japan, the Bank of Japan (BoJ) is also set to meet on Wednesday. There is a 70% probability in the market for a 10 basis point increase in rates to 0.2%, with some speculation about a 15 basis point move. The potential for higher borrowing costs has put pressure on the Nikkei index, which fell by 6% last week. However, the index managed to recover with a 2.2% gain early Monday, following a stronger finish on Wall Street.
The Bank of England’s (BoE) meeting on Thursday is generating mixed feelings. Futures markets show a 51% chance of a rate cut to 5%, but there is uncertainty about the BoE’s decision. This ambiguity reflects broader market speculation and the impact of evolving economic conditions on monetary policy.
In equity markets, MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.4% after a 2% drop last week. U.S. futures also posted positive movements, with S&P 500 futures rising by 0.4% and Nasdaq futures up by 0.6%. This week is crucial for U.S. equities, as around 40% of S&P 500 companies are set to report earnings, including major tech firms such as Microsoft, Apple, Amazon, and Meta Platforms. Given the high expectations for these reports, any underperformance could lead to significant adjustments in the valuations of these tech giants. Chris Weston from Pepperstone highlights that significant moves in individual stocks, particularly high-profile ones like Microsoft, could induce broader sector volatility.
In the currency markets, the Japanese yen showed a slight retracement from its recent gains. The dollar increased to 154.15 yen from last week’s low of 151.93 yen. The euro remained steady at $1.0855, having found support around $1.0825 the previous week.
Commodity markets saw mixed results. Gold prices rose by 0.5% to $2,398 an ounce, driven by expectations of a dovish stance from the Federal Reserve. Oil prices also experienced a modest uptick after falling by 1% last week due to concerns over Chinese demand. Brent crude oil gained 20 cents to $81.33 per barrel, while U.S. crude increased by 6 cents to $77.22 per barrel.
Overall, the upcoming week is poised to be pivotal for global markets, as investors and analysts closely monitor economic data, central bank decisions, and corporate earnings reports for indications of future trends and potential shifts in market dynamics.