Japan Leads Gains in Asian Shares Before Powell

Japanese stocks led gains in Asia as semiconductor-related shares followed their US peers higher. Investors are awaiting Jerome Powell’s testimony to Congress, Bloomberg reported.

The Nikkei 225 Stock Average climbed to a record, extending its advance for the year to more than 23%. Equity indexes in Australia also rose, along with US stock futures after the S&P 500 closed 0.1% up on Monday to set its 35th all-time high for this year. Shares in mainland China and Hong Kong fell, while the dollar edged higher against most major peers.

Information technology shares were the largest contributors to gains in the MSCI Asia Pacific Index. Sentiment around stocks with high exposure to AI is the most elevated since 2019, based on market’s view of future growth and options pricing, according to Citigroup.

Traders are awaiting Powell’s testimony beginning Tuesday for guidance on the Federal Reserve’s outlook. He faces pressure from lawmakers growing impatient for interest-rate cuts and others who are unhappy with the Fed’s latest plan to boost capital requirements for Wall Street lenders. Markets are pricing the chance of two rate cuts this year, with a roughly 70% chance of the first in September, according to swaps data compiled by Bloomberg.

“With the recent signs of softer growth and labor market, markets will closely watch if Powell gives any hints on the timing of rate cuts,” said Carol Kong, a strategist at Commonwealth Bank of Australia in Sydney. “Market pricing for a September cut can increase and the US dollar can fall further if Powell’s comments are perceived as dovish.”

In China, investors remain uncertain about the central bank’s new liquidity operations unveiled on Monday with policymakers having tightened their grip on interest rates and taken greater control over short-term borrowing costs. Investors read the move as if the People’s Bank of China just raised rates, triggering a bond market selloff. Market participants are also looking ahead to one of the country’s biggest annual policy meetings, approaching next week.

The Bank of Japan will speak face-to-face with market participants over the next couple of days in key meetings aimed at gauging a realistic pace for a reduction of its bond purchases to be announced later this month. Demand increased at a Japanese five-year auction even as traders speculated about when and how much the BOJ will trim back bond buying.

Australian consumer sentiment worsened in July as households worried about the prospect for further rate increases with inflation proving stickier than anticipated. Australia’s bonds mirrored Monday’s Treasury move, with shorter-term notes underperforming longer ones.

Long Bias

Bond markets appear to be beginning the back half of 2024 with a long bias, as economic data weakens as rate cuts approach in the fall, according to Thomas Tzitzouris at Strategas. Despite the long positioning, there are preliminary signs of shorts coming back, he said.

“When we break down the positioning data, we see a market that despite showing a long bias in anticipation of cuts, is not fully convinced this will occur with shorts slowly returning to the market,” Tzitzouris said.

The S&P 500 topped 5,570 on Monday ahead of Powell’s testimony, and as traders position for earnings from some of the largest American banks which unofficially kick off the second-quarter reporting season Friday. Expectations for the season are on the rise. Analysts’ upgrades to profit estimates have outnumbered downgrades, while forecasts for 12-month forward earnings stand at an all-time high.

In commodities, oil was little changed after a two-day decline as Hurricane Beryl looked less likely to pose major disruptions to crude infrastructure in Texas. Gold steadied after dropping by the most in two weeks on Monday. Copper crept lower.