Most Asian stocks rose, after the S&P 500 hit a new record high, as traders awaited Federal Reserve Chairman Jerome Powell's testimony before Congress and the start of the U.S. corporate earnings season.
Stocks in Japan, Australia and South Korea all rose, while Hong Kong and mainland China fell. U.S. futures were also higher in Asian trading after the S&P 500 closed slightly higher on Monday, hitting its 35th record this year. The dollar and Treasuries were little changed.
Traders will be focusing on Powell’s testimony on Tuesday for guidance on the Fed’s direction. Powell is facing pressure from lawmakers who are losing patience with interest rate cuts, while others are unhappy with the Fed’s latest plan to increase capital requirements for Wall Street lenders. Markets are pricing in two rate cuts this year, with a roughly 70% chance of the first in September, according to swaps data compiled by Bloomberg.
Expected hints
Carol Kong, a strategist at Commonwealth Bank of Australia in Sydney, said that with recent signs of weakness in growth and the labor market, markets will be watching closely to see if Powell gives any hints about the timing of rate cuts. “The market could price in a rate cut in September, and the US dollar could fall further if Powell’s comments are seen as dovish,” she said.
In China, investors are looking ahead to one of the country’s most important policy meetings of the year, due next week. There are also doubts about new liquidity operations unveiled by the People’s Bank of China on Monday as it tightens its grip on interest rates and puts more control over short-term borrowing costs. Investors read the move as if the central bank had just raised interest rates, triggering a sell-off in bond markets.
China's June consumer price index is due out on Wednesday, with analysts surveyed by Securities Daily expecting inflation to rise from a year ago due to increases in meat prices.
Bond market
In Australia, consumer pessimism deepened in July as households worried about the prospect of higher interest rates as inflation held firmer than expected. Australian bonds mirrored the move by U.S. Treasuries on Monday, with shorter-dated bonds underperforming longer-dated ones, said Thomas Tzitzouris of Strategas, who noted that while longs were strong, there were early signs of shorts returning.
He added: When analyzing the positioning data, we see that the market - although it shows a long bias in anticipation of a rate cut - is not completely convinced that this will happen, as selling slowly returns to the market.
The S&P 500 rose to 5,570 on Monday, ahead of Powell’s testimony. Traders are bracing for earnings from some of the biggest U.S. banks, which unofficially kick off their second-quarter earnings season on Friday, amid expectations of very strong growth. Analysts’ expectations for higher earnings outpaced expectations for downgrades. Meanwhile, 12-month earnings expectations remain at an all-time high.
Earnings forecast
John Stoltzfus of Oppenheimer Asset Management said that strong earnings expectations and a strong economy could support higher valuations for U.S. stocks, and raised his year-end target for the S&P 500 to 5,900.
For his part, Scott Rubner, of Goldman Sachs Group, says that the level of expectations for corporate results is high, a level that was preceded by high expectations already.
While Nationwide's Mark Hackett said that with earnings season starting this week, investors should be prepared for some volatility, but the market is likely to rally again once companies resume share buybacks.
In commodities, oil was little changed after two days of declines as there appeared to be less likelihood of Hurricane Beryl impacting and causing major disruptions to Texas crude infrastructure. Gold was steady after falling the most in two weeks yesterday.
