A powerful rally in U.S. and global stocks on Thursday, triggered by another decline in bond yields, has bolstered the growing belief that the global rate-hiking cycle is nearing its end. This surge in optimism sets the stage for a strong finish to the week in Asian markets on Friday.
Investors are increasingly confident that central banks like the Federal Reserve, Bank of England, and European Central Bank have concluded their rate-hiking endeavors. While the Fed’s recent announcement reflected a ‘dovish’ pause, the Bank of England introduced a ‘hawkish’ pause on Thursday. However, the overarching reaction in the markets was consistent—a significant upswing in bonds, stocks, and risk assets.
Market participants are now focusing on the onset and extent of easing cycles. The U.S. yield curve implies roughly 70 to 75 basis points of Fed easing next year, while the UK yield curve suggests nearly 50 bps of anticipated rate cuts.
Despite central bank policymakers emphasizing the need for continued policy restraint and ruling out rate cuts, markets are resolute in their belief that a significant shift is underway.
Bond yields experienced another drop on Thursday, with the U.S. 10-year yield falling by approximately 40 basis points from its recent peak above 5%. This yield reduction coincided with a decrease in the value of the dollar, which is encouraging news for emerging markets.
Asian stocks surged by 1.7%, marking their most substantial daily gain since July. Given the robust rally witnessed on Wall Street and globally, it’s highly probable that Asian markets will continue to rise on Friday.
In the U.S., the S&P 500 delivered its best performance in six months, driven by strong corporate earnings and guidance. For instance, Apple exceeded quarterly sales and profit expectations, despite experiencing a minor post-hours share decline.
The three primary Wall Street indexes are now on track to record their most impressive weekly gains of the year, with each aiming for a weekly increase of roughly 5%.
Japan’s Nikkei, following its 2.4% surge on Wednesday, posted a 1.1% spike on Thursday. Although the yen witnessed a modest rebound, it remains below 150 per dollar, near the 33-year low reached last year and is currently at its weakest level in over five decades on a real effective exchange rate basis.
Chinese markets, however, remain outliers. This week’s official and unofficial data revealed an unexpected contraction in the manufacturing sector during October, dispelling the optimism generated by the robust third-quarter GDP figures.
If the Caixin non-manufacturing purchasing managers’ report on Friday indicates a contraction in services—a slight growth was recorded in September with a reading of 50.2—Chinese stocks may diverge from the global trend, closing lower for the day and the week.
Here are key developments that may provide further guidance for markets on Friday:
- China and India Services PMI for October
- Australia Manufacturing and Services PMIs for October
- Speeches by Fed’s Barr, Barkin, and Kashkari
