SYDNEY, July 4 – Asian stock markets reached their highest levels in 27 months on Thursday, spurred by softer U.S. economic data that heightened the likelihood of a September interest rate cut. This development boosted bonds and commodities while negatively impacting the dollar.
The U.S. holiday resulted in thin trading as investors anticipated the outcome of the UK election, focusing on the potential majority for the Labour Party.
Market sentiment has been primed for change, with opinion polls consistently predicting a landslide victory for the centre-left Labour Party over the Conservatives.
“The Labour party has relatively modest tax and spending plans, with the overall goal of shrinking the UK’s large budget deficit,” stated analysts at CBA. “The Labour government’s policies will also move the UK back towards closer alignment to the EU.”
In France, polls indicated that the National Rally (RN) would not secure a majority in Sunday’s election, as mainstream parties collaborated to counter the far-right.
FTSE futures edged up 0.1%, with sterling holding steady at $1.2740. EUROSTOXX 50 futures remained mostly unchanged.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9%, marking its highest point since April 2022. Japan’s Nikkei climbed 0.9%, nearing its March peak, while the broader Topix reached an all-time high. Taiwan’s main index also hit a record, driven by the tech sector and Taiwan Semiconductor Manufacturing Co (TSMC), which surpassed T$1,000 for the first time.
S&P 500 and Nasdaq futures remained steady after setting new records overnight, following weak economic data from the U.S.
The U.S. ISM services activity index fell to its lowest level since mid-2020, with notably weak employment figures ahead of the June payrolls report due on Friday. Analysts cautioned that this series contradicted the strength seen in the PMI services survey but noted that both surveys indicated easing inflation.
A series of subdued data resulted in Citi’s U.S. economic surprise index dropping to -47.5, its lowest since August 2022. The Atlanta Fed’s GDPNow estimate also fell to 1.5% from 1.7%.
This development should be favorable for the Federal Reserve, with minutes from its last meeting showing that committee members wanted more evidence of a cooling economy before cutting rates. At the time of that meeting, the GDPNow growth estimate was around 3% annualized.
“Reading through the minutes from only three weeks ago, it is a good reminder of how quickly the activity outlook has deteriorated,” said Paul Ashworth, chief North America economist at Capital Economics. “Given the more encouraging personal consumption expenditure data in May, the risk of a reacceleration in inflation seems even less likely, particularly with GDP growth now running well below its potential,” he added. “We still think that the Fed will begin to cut interest rates this September.”
Market participants quickly raised the probability of a September rate cut to 74% from 65%, while pricing in 47 basis points of easing for this year. Yields on 10-year Treasuries dropped 8 basis points to 4.355%.
With the U.S. economy now appearing less exceptional, the dollar weakened across the board. The euro rose to $1.0785, recovering from its recent low of $1.0666, while the dollar index reached its lowest point in three weeks. The Australian dollar also gained, hitting a six-month peak of $0.6733 as markets speculated that local rates could rise next.
Conversely, the yen hit multi-year lows against various currencies as investors favored carry trades. The dollar stood at 161.53 yen after reaching a 38-year high of 161.96 overnight.
The dollar’s decline benefited commodities, with gold rising to $2,358 an ounce from $2,318 earlier in the week. Oil prices eased slightly after an overnight increase when a significant drop in U.S. crude stocks indicated stronger demand as the U.S. driving season began. Brent crude dipped 47 cents to $86.87 per barrel, while U.S. crude fell 53 cents to $83.35 per barrel.
