Asian stocks rose, joining a global rally, as bets that the US Federal Reserve will soon start cutting interest rates fuelled appetite for riskier assets in the market.
Hong Kong shares rose at the open, while mainland China bourses retreated. Stock indexes in Japan and Australia rose, while South Korea’s were flat, after U.S. stocks hit record highs, pushing global equities to a fresh peak.
Risk appetite is rising on optimism that the Federal Reserve will soon cut interest rates, as U.S. retail sales data showed resilience among consumers, fueling hopes for a soft landing in inflation. Market sentiment has shifted toward small-cap stocks, with the Russell 2000 up 12% in the past five sessions, its best performance since April 2020.
Mitsushige Akino, president of Ichiyoshi Asset Management, said that after the Russell 2000 index in the United States rose, small-cap stocks in Japan are expected to strengthen today.
Asian data expected
Australian and Japanese bond yields followed their U.S. counterparts lower overnight. Treasury yields were slightly higher Wednesday morning in Asia, with the 10-year yield up 1 basis point, following yesterday’s declines. Yields in New Zealand rose as the kiwi dollar strengthened after mixed inflation data clouded expectations of a rate cut.
The US dollar was little changed. The yen fell early today, for a third day against the dollar.
In Asia, economic data due includes Singapore's exports and Indonesia's monetary policy decision. Markets were closed in India and Pakistan.
Solita Marcelli, of UBS Global Wealth Management, expects that if the Fed can cut interest rates significantly in the context of a soft landing, there will be better prospects for reaccelerating earnings growth for lower-quality and cyclical sectors of the market.
Inflation continues
Some Wall Street economists are warning that the Fed is waiting too long to reverse course after raising interest rates to the highest level in two decades. Meanwhile, the International Monetary Fund has warned that inflation in many major economies is abating more slowly than expected, suggesting a potential risk to global growth from interest rates staying high for too long.
The strength in the stock market was based on optimism that the U.S. economy has weathered the worst of the Federal Reserve’s tightening. In that regard, yesterday’s better-than-expected retail sales report was a healthy development, according to Brett Kenwell of eToro. He noted that it’s better to see the Fed cut rates because of low inflation than to see it rush to support a weak economy.
The Russell 2000 is bullish, but investors should be prepared for profit-taking and potential consolidation in the coming sessions, says Dan Wantropski of Janney Montgomery Scott.
He noted that the long-term monthly chart of the Russell index shows a better picture of its potential, expressing his belief that the index could trade back towards its all-time highs, as the average rebound in relative strength highlights more bandwidth for the sector, versus the technology and artificial intelligence stocks that have been leaders this year.
In commodities, gold steadied after rising nearly 2% on Tuesday to a record high of $2,469.66 an ounce, while West Texas Intermediate crude fell for a fourth day.
