Markets

Nikkei Rebounds, Hang Seng Rises Amid Fed Pause Hope

A man walks past an electric monitor displaying Japan's Nikkei share average and recent movements outside a bank in Tokyo (Reuters).

Japan led Asian markets higher on Friday, amid rising bets the US Federal Reserve will skip a rate increase next week.

The Nikkei in Tokyo climbed by nearly 2%, while the Shanghai Composite was up 0.55% and Hang Seng Index in Hong Kong rose by close to 0.5%.

Virtually all other major exchanges in Asia and Australia were higher, except for the Sensex in Mumbai fell, along with Thailand and the Philippines.

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Thailand could face political strife again if the country’s conservative elite and military-appointed Senate seek to find ways to prevent the Move Forward Party from gaining power following its victory in last month’s national ballot, analysts say.

The Election Commission has ordered a recount of some of the polling in 16 stations, which some fear could be part of ‘dirty tricks’ to prevent Move Forward imposing reforms on the military and monarchy if it takes office.

Meanwhile, global equities were set for a small weekly gain on Friday following a Wall Street rally overnight.

MSCI’s broad index of global shares edged 0.2% higher, on track for a weekly rise of 0.6%.

Europe’s Stoxx 600 equity gauge was flat, following the Nikkei’s 2% jump – a strong rebound after its plunge from a 33-year high in the previous session.

Traders now lay 73% odds on the Fed keeping rates steady on June 14, in a range of 5%-5.25%, pausing its most aggressive hiking cycle since the 1980s.

Bets for a pause were supported by data overnight showing the number of Americans filing new jobless claims surged to a more than 1 1/2-year high, indicating a loosening labour market that could further quell inflation.

Quirk of debt ceiling negotiations

Investors also hope the Fed will pause its rate rise campaign as a quirk of the US debt ceiling negotiations has posed a potential a threat to market liquidity.

The US government is expected to rush to sell short-term debt to replenish its Treasury General Account, potentially at yields so high that banks raise deposit rates to compete for funding, reducing interest in riskier assets like equities.

“We’re all worried about liquidity,” said Ben Jones, director of macro research at Invesco. The Fed, he added, “still wants to tighten,” policy and therefore may allow the TGA rebuild to drain liquidity from markets without stepping in to provide other support tools.

This fear was not dominating trading on Friday, however.

On Wall Street overnight, gains were led by the tech-heavy Nasdaq, which surged 1.27%.

The broader S&P 500 rose 0.62%. Its gains put the benchmark index up 20% from its Oct. 12 closing low and heralded the start of a new bull market, at least by the definition of some market participants.

On Friday, e-mini US equity futures pointed to a steady start for each of the indices.

Fed chair Jerome Powell said on May 19 it was still unclear if US interest rates will need to rise further, and the risks of over-tightening or under-tightening had become more balanced.

Treasury yields rise

Two-year Treasury yields, which are extremely sensitive to monetary policy expectations, rose about 3.5 basis points (bps) to around 4.55%. The 10-year yield edged up to 3.749% after tumbling 7 bps overnight.

The US dollar index, which measures the currency against a basket of six major peers, rebounded 0.2% to 103.52.

The euro was slipped 0.15% to $1.0765, just below Thursday’s two-week high of $1.0787.

Elsewhere, the Turkish lira extended its decline to a new record low of 23.5 per dollar, even as President Tayyip Erdogan’s appointment of a US banker as central bank chief sent a strong signal for a return to more orthodox policy.

Erdogan had last week put well-regarded former finance minister Mehmet Simsek back in the post. Simsek said this week that the guiding principles for the economy would be transparency, consistency, accountability and predictability.

Leading crypto asset bitcoin briefly dipped before recovering to trade 0.5% firmer at $26,637 after crypto exchange Binance said it was suspending dollar deposits and would soon pause fiat currency withdrawal channels following a US Securities and Exchange Commission crackdown.

Crude oil remained on the back foot after a report that the United States and Iran were close to a nuclear deal, although denials from both parties kept it off the previous session’s lows.

The prospect of a deal, which reportedly includes scope for an additional 1 million barrels per day of Iranian production, had knocked down West Texas Intermediate (WTI) crude by $3.50 to just shy of $69 at one point on Thursday.

WTI futures fell 0.3% to $71.09. Brent crude futures were off by the same amount at $75.75.