Asian Equities Brace for Fed Effect, Yen Slips: Markets Wrap

(Bloomberg) — Asian equities braced for a tailwind from the Federal Reserve’s half-point rate cut and signs of further policy easing in the months ahead.

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Japanese equity futures rose, while contracts for US benchmarks also climbed, to largely erase Wednesday’s losses. The S&P 500 initially touched a record high before closing 0.3% lower, while the Nasdaq fell 0.5%. Australian equity futures were slightly lower while Hong Kong markets resume trading after a holiday.

The Fed’s first cut in more than four years was accompanied by projections indicating a narrow majority favored an additional 50 basis points of cuts across the remaining two policy meetings this year. Markets were pricing in a more aggressive 70 basis points of reductions. Fed Chair Jerome Powell cautioned against assuming big rate cuts would continue.

An index of dollar strength pared its gains from the previous session early on Thursday, while the yen weakened to trade at around 142 per greenback. Treasury 10-year yields advanced six basis points to 3.7% on Wednesday with Australian and New Zealand bonds tracking the moves in early trading.

“The rate-cut was a first step of the tough job for the Fed to manage soft-landing of economy,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “Traders will continue to weigh how deep the Fed would cut rate, giving the dollar-yen downward pressure going forward due to a decline in US interest rates. That said, Japanese stocks is set to rise today after the yen weakened overnight after all.”

In the US, equities, especially those of economically sensitive companies, briefly surged Wednesday, driving the S&P 500 up as much as 1%. From stocks to Treasuries, corporate bonds to commodities, every major asset was down Wednesday. While the scale of the declines were minor, a concerted pullback like that hadn’t followed a Fed policy decision since June 2021.

Gold pulled back from a record high while oil edged lower as signs of weak demand outweighed rising tensions in the Middle East.

“Though the Fed typically avoids acknowledging policy missteps, it appears that the larger than-expected initial rate cut reflects an effort to correct a slight lag in previous decisions,” Manish Bhargava, chief executive officer at Straits Investment Management, said. “By acting now, the Fed is taking a preemptive step to increase the likelihood of achieving a soft landing, balancing both its mandates in an increasingly uncertain economic environment.”

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In Asia, the Hong Kong Monetary Authority cut its base interest rate for the first time since 2020 following the Fed’s cut, while New Zealand’s economy shrank in the second quarter. Data set for release in the region includes unemployment for Australia and Hong Kong, trade figures for Malaysia and an interest rate decision in Taiwan.

Elsewhere, the Bank of England is likely to refrain for cutting rates for a second consecutive meeting.

In contemplating the market reaction to a half-point cut coming into the meeting, some expected the reaction to be positive because of the benefit to the economy, some expected a drop due to ‘what do they know that we don’t know’ logic, according to Mark Hackett at Nationwide.

“The lack of directional move was the least likely outcome, but it is the one that we got,” Hackett said. “The S&P 500 is having a difficult time breaking through July’s record high, and the more failed breakouts that we observe, the more difficult one will be to achieve.”

Treasuries, which are set for a fifth-straight month of gains in September, slipped after the Fed’s decision and Powell’s remarks. Officials’ updated quarterly forecasts showed the median projections were for the funds rate to fall by year’s end to 4.375% — representing a further half-point of total reductions this year. By the end of 2025 and 2026, the median forecasts are for 3.375% and 2.875%, respectively.

“It now will be a battle between market expectations and the Fed, with employment data — not inflation data — determining which side is right,” said Jack McIntyre at Brandywine Global. “Now, everyone is back to data dependency.”

Key events this week:

• UK rate decision, Thursday

• US Conf. Board leading index, initial jobless claims, existing home sales, Thursday

• FedEx earnings, Thursday

• Japan rate decision, Friday

• Eurozone consumer confidence, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures rose 0.3% as of 8:34 a.m. Tokyo time

• Hang Seng futures were unchanged

• S&P/ASX 200 futures fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.1111

• The Japanese yen fell 0.3% to 142.71 per dollar

• The offshore yuan was little changed at 7.0956 per dollar

• The Australian dollar fell 0.1% to $0.6757

Cryptocurrencies

• Bitcoin rose 1.7% to $61,246.78

• Ether rose 1.3% to $2,354.98

Bonds

Commodities

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Winnie Hsu and Yasutaka Tamura.

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