Asian Markets Poised for Dynamic Shift Amid Fed Speculations and Chinese Stimulus

Asian markets are set for a potentially transformative period following recent developments in global financial circles. A short-lived anticipation that the U.S. Federal Reserve may pursue a dovish policy was abruptly dispelled on Friday, as a stronger-than-expected payroll report suggested otherwise.

In response to this data, Treasury yields moved upwards on Monday, with yields exceeding 4%. Traders have now adjusted their expectations, introducing a slight possibility that there might be no interest rate cut from the Fed in November. This shift in sentiment has cooled the fervor on Wall Street, yet the potential for the U.S. economy to avoid a recession remains strong, which could, in turn, support a rally in Asian markets.

Mainland Chinese markets are likely to react to these developments as investors return from the Golden Week holiday. During this break, investors have had time to reflect on Beijing‘s vigorous stimulus measures, the most robust since the onset of the COVID-19 pandemic, aimed at reinvigorating China’s languishing economy.

Meanwhile, yields on U.S. 10-year and two-year Treasury notes have continued to climb, marking their highest levels since late July and mid-August, respectively. These movements reflect an 85% probability of a quarter-point cut by the Federal Reserve in November, with a 15% chance that rates will remain unchanged at the upcoming meeting.

Just a week prior, many had hoped the Fed would replicate September’s significant 50 basis point interest rate cut at its next meeting. However, the robust labor market has bolstered the case for the Fed to lean towards more hawkish policies.

The U.S. dollar experienced mixed movements, finishing slightly lower against both the yen and Swiss franc, two currencies often seen as safe-haven assets. This comes amid increasing geopolitical tensions as the anniversary of the Hamas attack on Israel, which ignited the Gaza war, threatened wider conflict in the region.

The dollar’s slight depreciation by about half a percent against the yen, following a surge above 149 to its highest point since August 15, benefitted Japan’s markets. The Nikkei index rose almost 2% on Monday, spearheading a broader rally across the Asian region.

MSCI‘s broad index of Asia-Pacific shares climbed nearly 1%, while its Asia index excluding Japan ascended by about half a percent. Investors are also looking to other key economic indicators for guidance, including Australia’s consumer sentiment figures, Japan’s Tankan manufacturing and service indexes, Taiwan’s trade balance for September, and the U.S. 3-year note auction results.

This report has been compiled by Alden Bentley in New York, with editorial contributions from Bill Berkrot. It adheres to Reuters‘ Trust Principles, maintaining integrity and freedom from bias, despite the opinions expressed solely reflecting those of the author.