Asian shares rose on Thursday on investor hopes for China’s emergence from the COVID-19 pandemic, while the dollar stayed under pressure even as the U.S. Federal Reserve had a warning against market bets on interest rate cuts this year.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1% to touch a four-month high in morning trade. Japan’s Nikkei bounced off a three-month low.
China has abruptly dropped ultra-strict curbs on travel and activity, unleashing the virus on the nation’s 1.4 billion people. Many funeral homes and hospitals say they are overwhelmed, but investors hope that once the infection waves pass, life and spending can return to normal and are looking beyond the most immediate difficulties.
“China reopening has a big impact…worldwide,” said Joanne Goh, an investment strategist at DBS Bank in Singapore, since it not only spurs tourism and consumption but can ease some of the supply-chain crunches seen during 2022.
“There will be hiccups on the way,” Goh said, during an outlook presentation to reporters. “We give it six months adjusting to the process. But we don’t think it’s reversible.”
China’s central bank also said overnight it will step up financing support to spur domestic consumption and key investment projects and support a stable real estate market.
E-commerce and consumer stocks were among the biggest gainers in Hong Kong, lifting the Hang Seng 2% to a six-month high while reopening hopes have driven China’s yuan to four-month highs and supported regional stocks and currencies.
The yuan rose about 0.2% to 6.8750 on Thursday.
China has partially eased an unofficial ban on Australian coal imports and the Australian dollar made a three-week high overnight just below $0.69. It last bought $0.6833.
Oil sounded the loudest note of caution, falling sharply overnight on worries that the near-term outlook is precarious in China and that a global slowdown will hurt demand. [O/R]
Brent crude futures steadied at $78.42 a barrel on Thursday after dropping 1.5% on Wednesday.
Asia’s optimism comes while minutes from the Federal Reserve’s December meeting, published on Wednesday, contained a caution against late-year rate cuts traders have priced in.
Fed committee members noted that “unwarranted easing in financial conditions” would complicate efforts to restore price stability, the minutes showed.
“Translating Fed speak, this is a warning to markets, that being too optimistic may ironically backfire,” said Vishnu Varathan, Mizuho Bank’s head of economics in Singapore.
“That is, insofar that premature rate cut bets drive looser financial conditions, the Fed may have to tighten even more to compensate.”
Fed funds futures pricing shows traders think the benchmark U.S. interest rate will peak just below 5% in May or June, before being cut back a little bit in the second half of 2023.
Wall Street indexes fluctuated on Wednesday, before closing with modest gains, but futures struggled in Asia trading and S&P 500 futures were last down about 0.4%. [.N]
Treasuries hung on to recent gains, with 10-year yields down a dozen basis points this week to 3.7070%. Yields fall when prices rise.
In currency markets, the dollar has been wobbly as investors navigate between the Fed’s hawkish tone and the support for riskier currencies driven by China’s reopening.
The yen was reeling back overnight losses and up about 0.5% to 131.87 per dollar as traders think this year – at last – will be one of policy tightening in Japan.
In Europe, unseasonally warm weather has disappointed skiers but been a boon for a euro basking in falling gas prices. Benchmark Dutch gas prices fell to 14-month lows overnight and the euro has climbed to $1.0619.