European equities are poised for a positive start as they track a global rally driven by technology stocks and a rebound in Asian and Wall Street markets. The optimistic sentiment is underpinned by anticipated policy moves from major central banks and recent economic data.
Global Market Rally Boosts European Futures
Euro Stoxx 50 futures and S&P 500 contracts both showed gains. The MSCI Asia Pacific Index saw its largest increase in nearly a month, bolstered by strong performances in technology markets across Japan, South Korea, and Taiwan, though Chinese stocks displayed mixed results.
Risk Appetite Returns with US Inflation Data
The return of risk appetite in the region follows favorable US inflation data for August, which has supported expectations of a Federal Reserve rate cut next week. European traders are now focusing on the European Central Bank, which is expected to announce another rate cut later on Thursday.
Tech Rebound and Market Sentiment
Jun Rong Yeap, market strategist at IG Asia, commented on the tech rebound and the increased risk-taking appetite in Asian markets. Yeap noted that while current rate expectations are split beyond September, there could be cautious sentiment as the Federal Reserve meeting approaches.
Debate Over Fed Rate Cuts
Traders are balancing optimism about a soft landing for the US economy with concerns that the Federal Reserve may be delaying necessary rate cuts. Swaps now price in a 25 basis point rate reduction for next week, but debates persist over the potential for further reductions, with some investors believing market expectations are overly optimistic.
Japanese Market and Yen Movements
The Nikkei index in Japan ended a seven-day losing streak as the US inflation report caused the yen to retreat from its strongest level against the dollar since December. A regional gauge of tech stocks rose over 3%, driven by Nvidia Corp.’s 8.2% jump and gains for Taiwan Semiconductor Manufacturing Co.
Core Inflation Data Impact
The core consumer price index, excluding food and energy, increased by 0.3% from July, marking the highest rise in four months. Year-over-year, it rose 3.2%, with a three-month annualized rate advancing to 2.1%, according to Bloomberg calculations.
Market Reactions to Rate Cut Expectations
Timothy Moe, chief Asia Pacific equity strategist at Goldman Sachs Group Inc., stated that stocks are likely to rally more with a 25 basis point cut rather than a 50 basis point cut, which could signal weaker growth. He emphasized that a moderate degree of rate cuts amid decent US growth is favorable for equity markets.
Currency and Commodity Movements
The dollar index remained steady following its fall on Wednesday. Oil prices extended their gains from Wednesday as Hurricane Francine disrupted key oil-producing regions in the Gulf of Mexico, leading traders to cover bearish positions. Gold traded above $2,515 per ounce.
Bank of Japan and Yen Movements
Bank of Japan policy board member Naoki Tamura’s comments on potentially raising the benchmark rate to at least 1% by the end of the projection period caused a brief upward movement in the yen, though it later fell back. Another board member, Junko Nakagawa, indicated continued policy adjustments based on economic performance, which also briefly strengthened the yen.
Upcoming Economic Data and Investor Sentiment
Japan’s producer price index for August rose less than expected. Upcoming Asian data includes producer prices for Hong Kong, inflation and industrial production figures for India, and a rate decision in Pakistan. Southeast Asian equities are gaining attention as a preferred trade among fund managers in light of the Fed’s policy pivot.
Fed Rate Cut Conundrum
Investors are grappling with whether the economy is heading towards a soft or hard landing, with Fed swaps pricing in over 100 basis points of rate cuts by year-end. Krishna Guha at Evercore highlighted that the stronger-than-expected core inflation data may complicate the Fed’s decision on a 50 basis point cut in September, with risks to markets and the soft landing scenario.
Corporate News
In corporate news, OpenAI is reportedly negotiating to raise $6.5 billion at a $150 billion valuation. Nvidia CEO Jensen Huang addressed supply limitations that have caused customer frustration. Alimentation Couche-Tard Inc. is also working to enhance its takeover bid for Seven & i Holdings Co., aiming to prompt discussions with the Japanese convenience store operator.
Key Events This Week
- ECB rate decision, Thursday
- US initial jobless claims and PPI, Thursday
- Eurozone industrial production, Friday
- Japan industrial production, Friday
- U.S. Michigan consumer sentiment, Friday
Market Moves Summary
Stocks
- S&P 500 futures rose 0.2% as of 6:45 a.m. London time
- Nasdaq 100 futures rose 0.2%
- Futures on the Dow Jones Industrial Average rose 0.1%
- The MSCI Asia Pacific Index rose 1.6%
- The MSCI Emerging Markets Index rose 1.2%
- Japan’s Topix rose 2.6%
- Australia’s S&P/ASX 200 rose 1%
- Hong Kong’s Hang Seng rose 1.1%
- The Shanghai Composite rose 0.1%
- Euro Stoxx 50 futures rose 1.3%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1017
- The Japanese yen fell 0.4% to 142.88 per dollar
- The offshore yuan was little changed at 7.1264 per dollar
- The British pound was little changed at $1.3050
Cryptocurrencies
- Bitcoin rose 1% to $58,059.76
- Ether rose 0.5% to $2,360.02
Bonds
- The yield on 10-year Treasuries advanced one basis point to 3.66%
- Germany’s 10-year yield declined two basis points to 2.11%
- Britain’s 10-year yield declined six basis points to 3.76%
- Australia’s 10-year yield advanced two basis points to 3.87%
Commodities
- Spot gold rose 0.3% to $2,518.55 an ounce
- West Texas Intermediate crude rose 1% to $68 a barrel
Conclusion
As European markets prepare to open, they are likely to reflect the global momentum fueled by positive developments in technology stocks and supportive economic data. The focus remains on upcoming central bank decisions and economic indicators, which will shape investor sentiment and market trends in the near term.
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