Asian shares outside Japan experienced a slight decline on Tuesday as investors assessed the potential implications of a Trump victory on China. Meanwhile, the yen continued its downward trend, eliciting new warnings from officials following last week's suspected intervention. Europe is expected to open lower, with EUROSTOXX 50 futures dropping by 0.3%. In contrast, S&P 500 futures rose by 0.2% and Nasdaq futures by 0.3%, buoyed by dovish comments from the Fed, which fueled expectations of additional U.S. rate cuts this year, boosting Wall Street.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped by 0.3%, following a similar decline on Monday. Japan resumed trading after a public holiday, with the Nikkei index increasing by 0.3%. Overnight, investors continued to process the repercussions of the failed assassination attempt on former U.S. President Donald Trump, who nominated J.D. Vance as his vice presidential running mate. Opinion polls indicate a tight race between Trump and President Joe Biden, with Trump leading in several swing states that could determine the election outcome.
The Dow Jones reached a new record closing high, driven by energy and banking shares. Bitcoin surged, gold approached a record high, and the yield curve steepened as investors favored so-called Trump-victory trades. "J.D. Vance is aligned with a direct approach towards China in pursuit of better trade deals for the U.S., which will likely dampen sentiment towards China," noted Chris Weston, head of research at Pepperstone. The Shanghai Composite index declined by 0.1%, while Hong Kong's Hang Seng index fell by 1.4%, having already dropped by 1.5% the previous day due to weak economic data from China, which heightened the risk of Beijing missing its 5% growth target this year without significant stimulus.
Both Taiwanese and South Korean shares saw a modest increase of 0.2%. Fed Chair Jerome Powell stated on Monday that the three U.S. inflation readings over the second quarter "somewhat bolster confidence" that inflation is returning to the Fed's target sustainably. Markets have now fully priced in a quarter-point rate cut from the Fed in September, with a total easing of 68 basis points expected by the end of the year.
This situation kept the U.S. dollar subdued overnight, although it gained 0.1% on Tuesday against a basket of major currencies due to renewed yen weakness. The yen weakened by 0.4% to 158.67 per dollar, struggling to maintain its gains after Tokyo's suspected intervention last week disrupted the popular carry trade. It also prompted new warnings from Japanese officials that the government is prepared to take all necessary measures to counteract excessively volatile currency movements.
"I have actually bought dollars here. I believe the U.S. dollar has likely bottomed for now," said Tony Sycamore, analyst at IG. "We've seen the reaction to the soft CPI data and the dovish Powell. And I think the risks to the dollar are to the upside here." "The notion that a Trump administration is more likely to reach the White House and increase tariffs on China is not favorable for Chinese stocks. Combined with a stronger U.S. dollar and higher yields, I think it will be a challenging period for the Hang Seng."
Long-term Treasuries stabilized in Asia, with the 10-year yield decreasing by 2 bps to 4.2060%, after rising by 4 bps overnight. Gold increased by 0.3% to $2,428.67 an ounce, nearing a record high. Oil prices slightly declined due to concerns that a slowing Chinese economy would reduce demand. Brent futures fell by 0.3% to $84.63 a barrel, while U.S. West Texas Intermediate (WTI) crude slipped by 0.3% to $81.64.
