(Bloomberg) — Asian equities were set to join a global stock rally as bets the Federal Reserve will soon start cutting rates fueled a rush into riskier corners of the market.
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Equity futures for Japan, Australia and Hong Kong all rallied Wednesday after US shares advanced to fresh highs, pushing global stocks to a new peak.
Gains in the US were marked by a rotation into smaller stocks. The small-capitalization Russell 2000 Index is up 12% in the last five sessions, something it hasn’t done since April 2020.
“Rotation is the name of the game,” said Andrew Brenner at NatAlliance Securities. “This is consistent with the increased perception of cutting rates.”
Brenner highlighted the fact that around 4 a.m. New York time on Tuesday, Russell 2000 futures spiked — while contracts on the Nasdaq 100 slipped. “This means that overseas money, big money, made a very large rotation trade overnight,” he said.
Treasuries rallied across the curve Tuesday. The 10-year yield fell seven basis points, while the policy-sensitive two-year yield fell by four. The dollar was little changed. The yen was steady early Wednesday after two daily declines against the greenback.
In Asia, economic data due for release includes exports for Singapore and a monetary decision in Indonesia. Markets are closed in India and Pakistan.
Gains for risk assets on Tuesday reflected growing confidence among investors that the Fed is inching toward a rate cut.
To Solita Marcelli at UBS Global Wealth Management, if the Federal Reserve can cut rates significantly in the context of a soft landing, there will be better prospects for a re-acceleration in earnings growth for lower quality and cyclical segments of the market.
Some Wall Street economists are even cautioning the Federal Reserve is waiting too long to reverse course after raising interest rates to a two-decade high. The International Monetary Fund, meanwhile, warned inflation in many major economies has been cooling slower than expected, flagging a potential risk to global growth from interest rates staying higher “for even longer.”
US Stocks
The KBW Bank Index, one of the broadest gauges of the US banking system, rose more than 3% to levels not seen in more than a year, as large lenders revealed robust earnings.
Bank of America Corp. gave a forecast for net interest income, its biggest source of revenue, that exceeded expectations. Morgan Stanley’s traders joined the party across Wall Street in the second quarter even as the firm’s larger wealth business fell short of expectations. Charles Schwab Corp. warned it will have to shrink itself in order to protect profits.
The strength of the equity market has been underpinned by optimism the economy has withstood the worst of Fed tightening. In this regard, Tuesday’s better-than-estimated retail sales report was a “healthy” development, according to Bret Kenwell at eToro. It’s better to see the Fed cutting rates on falling inflation than to see the central bank rushing to bolster a weakened economy, he noted.
Gains for the Russell 2000 are bullish, but investors should be ready for potential profit-taking in the sessions ahead, according to Dan Wantrobski at Janney Montgomery Scott.
“The longer-term monthly chart on the Russell shows a better picture of its potential,” he noted. “We believe the Russell 2000 can trade back toward its all-time highs as mean reversion in relative strength highlights further bandwidth for the sector against this year’s leadership,” of big tech, he said.
In commodities, gold was steady after rallying almost 2% Tuesday to a record $2,469.66 per ounce, while West Texas Intermediate fell for a third session.
Key events this week:
Eurozone CPI, Wednesday
US housing starts, industrial production, Wednesday
Fed Beige Book, Wednesday
Fed’s Thomas Barkin speaks, Wednesday
ECB rate decision, Thursday
US initial jobless claims, Philadelphia Fed manufacturing, Conference Board LEI, Thursday
Fed’s Mary Daly, Lorie Logan and Michelle Bowman speak, Thursday
Fed’s John Williams, Raphael Bostic speak, Friday
Some of the main moves in markets:
Stocks
Nikkei 225 futures rose 0.6% as of 6:45 a.m. Tokyo time
Hang Seng futures rose 0.6%
S&P/ASX 200 futures rose 0.7%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0900
The Japanese yen was little changed at 158.34 per dollar
The offshore yuan was little changed at 7.2890 per dollar
Cryptocurrencies
Bitcoin was little changed at $64,647.23
Ether was little changed at $3,438.32
Commodities
This story was produced with the assistance of Bloomberg Automation.
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