On Tuesday, Japanese stocks spearheaded a rise in Asian markets as the yen weakened, setting the stage for a week packed with economic data releases, including crucial U.S. inflation figures. These data points are crucial for investors to assess the Federal Reserve's policy stance following last week's market turbulence. Oil prices stabilized after a significant 3% surge on Monday, as investors remained cautious about the potential for escalating conflicts in the Middle East that could disrupt global oil supplies. Meanwhile, demand for safe-haven assets boosted gold prices, though they experienced a slight dip on Tuesday.
Japan's Nikkei index climbed over 3% after a holiday on Monday, providing a much-needed respite following last week's volatile trading that started with a substantial sell-off driven by a strengthening yen and concerns over a U.S. recession. MSCI's index of Asia-Pacific shares outside Japan inched up 0.15% to 556.55. Chinese equities saw minor declines, whereas Hong Kong's Hang Seng Index increased by 0.1%. European stock markets were poised for a positive start, with Eurostoxx 50 futures rising 0.3% and FTSE futures up by 0.26%.
Viktor Shvets, head of global desk strategy at Macquarie Capital, noted in a report, "While aftershocks might reveal vulnerabilities, we continue to see recent volatility as akin to a 'heart palpitation' rather than a 'cardiac arrest.'" He also maintained that the anxiety over a U.S. economic slowdown is exaggerated. However, investor sentiment remains delicate. The yen fell 0.34% to 147.72 against the dollar on Tuesday, having reached a seven-month high of 141.675 the previous Monday, significantly higher than the 38-year low of 161.96 seen at the start of July.
A Bank of Japan interest rate hike last month, following interventions by Tokyo earlier in July, caught investors off guard and prompted them to exit carry trades, which involve using a low-interest-rate currency to fund investments with higher yields. Weekly data up to August 6 indicated that leveraged funds, typically hedge funds and various money managers, reduced their yen positions at the fastest pace since March 2011. Given the yen's recent strength, Karsten Junius, chief economist at Bank J. Safra Sarasin, stated that the dollar-yen relationship is now more aligned with its yield differential.
This week's data is expected to clarify the Federal Reserve's future actions. Market expectations are evenly divided between a 25 basis-point cut or a 50-bp cut at the September meeting. Traders are anticipating a total of 100 bps in cuts for the year. Soft payrolls data sparked concerns of a U.S. recession and triggered the market downturn at the beginning of last week. However, robust U.S. data eased fears of a global slowdown, leading to a recovery in stocks by the week's end. U.S. producer price data for July is scheduled for release later on Tuesday, which could influence the core personal consumption (PCE) measure favored by the Fed.
Any indications from the PPI of subdued inflationary pressures could intensify bets that the Fed will significantly reduce rates this year, potentially weakening the dollar, according to Kristina Clifton, a senior economist at Commonwealth Bank of Australia. On Wednesday, U.S. consumer price index data for July is due, expected to show a slight increase in month-on-month inflation to 0.2%. Retail sales data is slated for Thursday. The dollar index, which compares the U.S. currency against six major rivals, was up 0.04% at 103.12. The euro remained stable at $1.0940, while the pound sterling rose 0.1% to $1.2778.
In commodities, Brent crude futures declined 0.67% to $81.75 per barrel, and U.S. West Texas Intermediate crude futures fell to $79.59 a barrel, down 0.59%. Both benchmarks had seen gains of over 3% on Monday.
