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Fed comments trigger relief rally

(ATF) Hong Kong: Asian bulls were enthused by US Federal Reserve assurance that inflation was transitory, comments that lifted risk assets on relief that monetary conditions in the world’s largest economy would not be tightened anytime soon.

Federal Reserve Governor Christopher J. Waller said overnight that despite the unexpectedly high CPI inflation report, the “factors putting upward pressure on inflation are temporary, and an accommodative monetary policy continues to have an important role to play in supporting the recovery.”

That assurance boosted US Treasuries, sending the 10-year yield tumbling 4 basis points to 1.64%.

Japan’s Nikkei 225 index jumped 2.32%, Australia’s S&P ASX 200 advanced 0.45%, Hong Kong’s Hang Seng index rose 1.11%, China’s CSI300 soared 2.36%. Regionally, the MSCI Asia Pacific index added 1.61%.

Tech gains

“If core inflation in May and June peaks near 3% before falling back towards 2% during the rest of 2021, then the Fed will support risk assets still by not tapering its bond buying this year,” said Mansoor Mohi-uddin, Chief Economist at Bank of Singapore.

“Thus, the central bank would still benefit risk assets by not tapering its quantitative easing until 2022 nor lifting interest rates until 2024.”

Expensive growth stocks, which are sensitive to higher interest rates, rallied on this news with the tech sector leading the gains. However, with interest rates seen going up at a later stage the rotation into value stocks is expected to resume.

“Growth stocks, such as Big Tech, are valued more off future earnings growth and the rotation from growth to value stocks is already evident in this year’s performance, where the S&P 500 is up nearly 10% versus Nasdaq’s 2%,” said Chris Turner, ING Bank’s Global Head of Markets. “The challenge for financial markets will be whether this is an orderly or disorderly rotation – e.g. whether Big Tech just under-performs or brings the overall market lower.”

Gold climbs

Reflecting some of these concerns on inflation gold prices jumped adding 0.6% to $1,836 per ounce.

Alleviating the inflation concern was the decline in prices of commodities. Iron ore continued its fall from a record amid efforts by China to clamp down on surging prices, with the metal set for the biggest two-day plunge since 2019.

Iron ore futures – now down more than 9% – reacted after officials in the city of Tangshan, a key steel producer, warned factories to maintain market order.

Still, markets are expected to remain volatile as divergent views on inflation and interest rates emerge.

“Surprising recovery in markets with the S&P rebounding off its medium term average. It’s clear that international investors are still minded to focusing on the positives and ignoring the negatives,” said Gary Dugan, CIO at Purple Asset Management.

“From Asia the Challenges of COVID are still very real and could ultimately cause a more significant pullback in markets.”

Also on Asia Times Financial

Asia Stocks

  • Japan’s Nikkei 225 index jumped 2.32%
  • Australia’s S&P ASX 200 advanced 0.45% 
  • Hong Kong’s Hang Seng index rose 1.11%
  • China’s CSI300 soared 2.36%
  • The MSCI Asia Pacific index added 1.61%

Stock of the Day

Genscript Biotech Corporation shares jumped as much as 23% after controlling shareholder GNS Holdings said it would buy an additional 8% stake in the company.

Umesh Desai

Umesh Desai is the Executive Editor at Asia Financial. Prior to this he spent over two decades with Reuters News as Asia Pacific Chief Correspondent in Hong Kong and Bureau Chief in Bombay. Before becoming a journalist Umesh was a credit ratings analyst with Moody's arm in India - ICRA. A chartered accountant by training, Umesh began his career as an equity analyst. His Twitter handle is @umesh_desai


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