Outside Japan, MSCI’s broadest index of Asia-Pacific shares added 0.47%
Asian stocks rose on Tuesday while the dollar and U.S. Treasury yields came under pressure, with just a day to go before the expected start of the Fed’s easing cycle that could see policymakers deliver an outsized rate cut.
Extended holidays in China and South Korea made for thin trading conditions, with investors focused on Wednesday’s Fed decision as odds have crept up in the past week in favour of a 50 bp rate cut.
That kept the dollar near its lowest level in more than a year against the yen at 140.64, having declined below the 140-yen level in the earlier session.
The stronger yen stoked concerns about Japanese exporters’ earnings and pulled down Tokyo’s Nikkei by 2% as the traders returned from a national holiday on Monday.
Outside Japan, MSCI’s broadest index of Asia-Pacific shares added 0.47%. Hong Kong’s Hang Seng Index gained 1.44%.
S&P 500 futures and Nasdaq futures both dropped slightly, though EUROSTOXX 50 futures tacked on 0.33% and FTSE futures added 0.57%.
Markets are now pricing in a 67% probability that the Federal Reserve could cut rates by half a percentage point at the conclusion of its monetary policy meeting on Wednesday, after a slew of media reports revived the prospect of more aggressive easing.
The case for a 50 basis points rate cut this week hinges in part on the idea that rates are well above most estimates of neutral – if officials judge that keeping policy in restrictive territory for too long creates unnecessary risk for the economy then there is no sense in dragging their feet, according to Neil Shearing, group chief economist at Capital Economics.
The problem is this is a high bar for a big rate cut, especially at the start of the easing cycle. If nothing else, it creates the impression that central bankers have made a mistake and fallen behind the curve, he said.
For the year, markets have priced in nearly 120 basis points worth of cuts by December.
The two-year U.S. Treasury yield, which typically reflects near-term rate expectations, was at 3.5547%, having declined to a two-year low of 3.5280% in the previous session. The benchmark 10-year yield was little changed at 3.6232%.
