June 3 2024: Asian share markets rallied on Monday as investors anticipated interest rate cuts in Europe and potentially Canada, reflecting a broader trend of global policy easing. However, persistent inflation could make the process more gradual.
Positive news from China contributed to the optimism, with the private Caixin survey showing a rise in its main factory index to a two-year high of 51.7 in May, up from 51.4 in April. Japan’s factory activity expanded for the first time in a year in May, while South Korea experienced its fastest growth in factory activity in two years.
These developments helped MSCI’s broadest index of Asia-Pacific shares outside Japan rebound 1.4%, after a 2.5% decline last week. Chinese blue chips added 0.3%, Japan’s Nikkei rose 1.1% after recovering from one-month lows on Friday, and South Korea gained 1.8%.
EUROSTOXX 50 futures climbed 1.0% and FTSE futures increased by 0.8%, reflecting the broader risk-on mood.
South Korea’s Potential Resource Boom and India’s Market Surge
South Korean President Yoon Suk Yeol announced the potential discovery of vast oil and gas reserves off the country’s east coast. Meanwhile, Indian markets hit record highs on expectations that Prime Minister Narendra Modi’s alliance will expand its parliamentary majority, fostering greater economic reforms.
Month-end flows saw Wall Street stage a late rally on Friday, with the Nasdaq up almost 7% for May. Early Monday, S&P 500 futures were up 0.2%, with Nasdaq futures adding 0.3%. The global prospect of lower borrowing costs has generally been positive for equities.
ECB Poised to Lead on Rate Cuts
The European Central Bank (ECB) is expected to cut rates by a quarter point to 3.75% on Thursday, marking the first time it would ease ahead of the U.S. Federal Reserve. However, a higher-than-expected eurozone inflation reading last week dampened hopes for rapid reductions, with markets pricing in 57 basis points of easing for the year.
Bruce Kasman, head of economic research at JPMorgan, suggested that ECB President Christine Lagarde might signal a downward direction for rates but emphasize that future moves will be data-dependent, with no pre-commitment to a specific rate path.
The Bank of Canada is also expected to cut rates at its meeting on Wednesday, with markets implying an 80% chance of a cut and pricing in 59 basis points of easing for the year. Analysts are hopeful for even deeper easing.
Investors are less optimistic about the Fed, seeing little chance of a move until September, and even that is uncertain. This outlook could shift with key data due this week, including surveys on services and manufacturing and the May payrolls report, where unemployment is expected to hold at 3.9% with 190,000 net new jobs.
Forex and Commodity Market Movements
In forex markets, the Japanese yen remains the weakest among the majors, despite the government spending significantly to slow its decline. Data showed Tokyo spent 9.788 trillion yen ($62.27 billion) on currency intervention between April 26 and May 29. The dollar firmed to 157.41 yen, just short of last week’s peak at 157.715. The euro held steady at $1.0855, benefiting from the EU inflation report but facing resistance at $1.0895.
Gold was slightly softer at $2,322 an ounce, having rallied for four months in a row, supported partly by central bank and Chinese buying.
Oil prices fluctuated after OPEC+ agreed on Sunday to extend most of its oil output cuts into 2025, with some cuts starting to unwind from October 2024. Brent eased 10 cents to $81.01 a barrel, while U.S. crude lost 6 cents to $76.93 per barrel.
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