Asian stock markets start the week higher while the dollar weakens. After the data on American consumption, the markets drastically reduce the chances of a Federal Reserve rate increase in September. Tokyo rises despite a below-expected GDP, while crucial new data is expected from China to understand the stability of the world’s second largest economy.
The market week begins with a rapidly changing bet: the Federal Reserve may not raise rates in September. This is the most important signal coming from the Asian stock markets, together with a dollar that has fallen towards the lows of the last two months and predominantly positive stock prices.
MSCI’s index of Asia-Pacific shares excluding Japan advanced 0.5%, while Japan’s Nikkei gained about 0.3%. China is stronger: the CSI 300 rises by 0.8% and the Hang Seng in Hong Kong by 1.6%.
The movement to observe is not only that of the stock markets. The real protagonist of the opening of the week is the dollar, penalized by a series of weaker than expected American data which is changing expectations on US monetary policy.
The chances of a Fed hike in September are collapsing
According to market indications collected by CME FedWatch, the probability attributed by investors to a Fed rate hike at the September 15-16 meeting has fallen to around 30%, from around 50% a week ago.
The turning point came especially after data on retail sales in the United States, which fell by 0.6% in July, against expectations for a slight increase of 0.1%. It was the first decline in nine months and the steepest in 14 months.
Even more significant for growth was the data on the so-called “core” sales, those most used in the calculation of consumption within the GDP: -0.4%, while economists expected an increase of 0.3%.
The slowdown in consumption adds to weaker signals from the labor market and relatively contained inflation. The result is that the market is returning to favor the scenario of a Fed remaining firm on rates, at least in the next meeting.
And it is a prospect that, at least for the moment, the stock markets like.
Dollar at two-month lows, euro rises to 1.1588
The change in expectations on the Fed is directly reflected on the currency market.
The dollar weakened against major currencies and the euro rose to as high as $1.1588, its highest level in two months.
The dynamic is also important for European investors. Less aggressive expected US rates may reduce the relative attractiveness of dollar-denominated assets and ease pressure on the global cost of money.
The bond market is also seeing the change. The two-year US Treasury yield, which is particularly sensitive to expectations about the Federal Reserve, fell towards 4.15%, after hitting a seven-week low of 4.0977% last week. The American ten-year bond is moving around 4.68%.
For stock markets, it’s a favorable balance, at least as long as weaker data is interpreted as a reason to stop the Fed and not as a sign that a recession is coming.
Japan grows less than expected, but Tokyo rises
A second important front comes from Japan.
Japanese GDP grew by 1.1% annualized in the second quarter, significantly less than the +2% expected by the market. On a quarterly basis, the increase was 0.3%, against a forecast of 0.5%.
Despite the disappointment, the Nikkei remained in positive territory.
However, the data raises a question about the Bank of Japan. Markets have increased bets in recent weeks on a new increase in Japanese rates and a tightening could arrive as early as September.
The situation also remains delicate on the currency front. In fact, the yen continues to move close to 159 per dollar, not far from the threshold of 160 which in recent months has increased the alarm over possible interventions by the Japanese authorities on the foreign exchange market.
Meanwhile, Japanese government bonds continue to sell off: the 10-year yield has risen to around 2.925%, close to the highest levels of the last thirty years.
China, eyes on July data
China represents the other big test of the day.
Beijing has unusually decided to postpone the publication of data on economic activity for July to the European session, with the release scheduled for 3pm Chinese time, 9am in Italy.
Data on industrial production, retail sales, investment and real estate will be released at the same time.
The expectation is, above all, for industrial production, which could slow down to 4.8% per year from 5.3% in June.
The Chinese market, however, enters the meeting on the rise.
The structural problem of the Chinese economy remains: in the second quarter the GDP grew by 4.3%, the lowest pace for three and a half years, while consumption, investments and the real estate market continue to show difficulties.
Oil near 89 dollars and gold above 4,390
Alongside stock markets and rates, the geopolitical variable continues to weigh.
Brent moves around $88.67 a barrel, after rising 6% in the previous week. American WTI crude oil is trading just above 82 dollars.
The market remains conditioned by tensions in the Middle East and uncertainty over supplies through the Gulf area.
Gold, however, benefits from both geopolitical tensions and the weakness of the dollar: the spot price rises by 0.4% to around 4,391 dollars per ounce, after the +0.8% recorded the previous week.
What it means for European stock markets
The first signal for Europe is moderately positive. Futures on the EuroStoxx 50 indicate an increase of 0.3%, while in the United States, futures on the Nasdaq advance by 0.3% and those on the S&P 500 by 0.1%.
For Piazza Affari and the other European stock exchanges, however, the central point of the day will not just be to verify whether the Asian rise will continue.
The market will have to understand why the Fed might stop.
The market is betting on a less aggressive Fed. Now he has to figure out if he can do it without starting to fear growth.
