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Asian share markets rally on rate cut prospects

Asian share markets

MSCI’s broadest index of Asia-Pacific shares outside Japan soar 1.4%, having slipped 2.5% last week

Asian share markets rallied on Monday, as investors looked forward to an interest rate cut in Europe as the next step in global policy easing, though stubborn inflation threatens to make the process a drawn out affair.

There was also better news from China as the private Caixin survey showed a rise in its main factory index to a two-year high of 51.7 in May, from 51.4 in April.

Japan’s factory activity expanded for the first time in a year in May, while activity in South Korea increased at the fastest pace in two years.

All of which helped MSCI’s broadest index of Asia-Pacific shares outside Japan soar 1.4%, having slipped 2.5% last week. Chinese blue chips gained 0.3%.

Japan’s Nikkei gained 1.1%, after bouncing back from one-month lows on Friday, while South Korea added 1.8%.

Meanwhile, EUROSTOXX 50 futures jumped 1.0% and FTSE futures 0.8%, as the risk-on mood spread.

South Korean President Yoon Suk Yeol flagged the possibility of a vast amount of oil and gas reserves in the sea off the country’s east coast.

Indian markets reached record highs on wagers Prime Minister Narendra Modi will expand his alliance’s majority in parliament when election results are released on Tuesday, leading to greater economic reforms.

The prospect of lower borrowing costs globally has been generally positive for equities.

The ECB is considered nearly certain to cut rates by a quarter point to 3.75% on Thursday, the first time in history it would have eased ahead of the U.S. Fed.

However, a surprisingly high number for euro zone inflation out last week reduced hopes for a rapid round of cuts and markets have 57 bps of easing priced in for this year.

The probability of back-to-back cuts now seems very low, putting the focus for a second move on September, according to Bruce Kasman, head of economic research at JPMorgan.

We suspect President Christine Lagarde will signal that the direction of rates is downward next week, but the policy statement will emphasise that future moves are data-dependent, and there is no pre-commitment to a specific rate path, he added.

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