Asia stocks rally on China optimism, Fed rate bets: markets wrap

Asian stocks are set to enter a bull market after US equities had their best day in more than a month on Friday, driven by China’s reopening trade and expectations of slower rate hikes.

The MSCI Asia Pacific Index rose 1.7% on Monday as stocks from Sydney to Hong Kong rallied, tracking a more than 2% Friday gain in the S&P 500. The Asia-wide gauge is on track to climb 20% from its October low, with the gains driven by Chinese stocks after the nation pivoted on its Covid strategy and offered more policy support for economy and developers.

The dollar extended Friday’s drop as traders bet that the Fed will slow rate hikes with the Institute for Supply Management’s index of services in contraction territory and wage growth slowing. The South Korean won, a benchmark emerging market risk currency, strengthened past 1 250 per dollar for the first time in six months.

China’s economic growth will quickly rebound and return to its “normal” path as Beijing provides more financial support to households and companies to help them recover after the nation ended its Covid-Zero policy, Guo Shuqing, party secretary of the People’s Bank of China, said in an interview with People’s Daily published on Sunday.

Goldman Sachs Group Inc. predicts a further 15% upside for the MSCI China Index. The Hang Seng China Enterprises Index, which tracks Chinese companies, rose as much as 2.5% on Monday. The offshore yuan strengthened past 6.8 per dollar for the first time since August.

“Asian markets have been through a much more severe bear market than it typically tends to see and the China reopening will be more positive even for Asia-ex China markets,” Rupal Agarwal, a quantitative strategist at Sanford C Bernstein in Singapore, said on Bloomberg TV. The 2022 laggards will come back sharply this year, “so we are favoring more China, Korea and Taiwan,” she said.

The US December inflation report due Thursday will be front of mind for traders after last week’s jobs data failed to offer a clear picture, with unemployment at its lowest level in decades, while wage gains were weak. Kansas City Federal Reserve’s Esther George on Friday warned that officials will have a tough road ahead as they attempt to balance inflation and employment while others have previously emphasized rates will be higher, and held there for longer than earlier anticipated.

Swaps contracts show investors expect the policy rate to peak at under 5% this cycle, down from 5.06% just before Friday’s jobs report. While traders remain divided about the size of February’s hike, with 32 basis points of tightening priced in, it appears that a quarter-point move is seen as more likely than a half-point increase.

While pressure on the Fed to hike by 50 basis points on Feb. 1 has eased, “policy makers appear to be increasingly frustrated by market-pricing at odds with Fed signaling in terms of both the terminal funds rate and timing of initial rate cut,” BNP Paribas economists led by Carl Riccadonna wrote in a note to clients. “This could tilt their bias toward a more forceful response at the next meeting.”

Investors will also be keeping a close eye on Brazilian assets after thousands of supporters of former President Jair Bolsonaro stormed the country’s top government institutions in an insurrection that will test the leadership of President Luiz Inacio Lula da Silva just a week after he took office.

Some of the main moves in markets:

Stocks

• S&P/ASX 200 gained 0.6%
• Kospi Index surged 2.5%
• Hang Seng Index rallied 1.6%
• S&P 500 futures edged 0.3% higher. Cash market rose 2.3% Friday
• Nikkei 225 futures added 0.9% on Friday. Cash markets are closed for a public holiday

Currencies

• Bloomberg Dollar Spot Index fell 0.4%; dropped 1% on Friday
• The Japanese yen gained 0.3% to 131.71 yen per dollar Monday
• The Australian dollar rose 0.8% to 69.32 US cents
• The euro lifted 0.3% to $1.0680

Cryptocurrencies

• Bitcoin rose 1.7% to $17,244.04

Bonds

• The yield on Australian 10-year notes fell 10 basis points to 3.72%
• The yield on 10-year Treasuries declined 16 basis points to 3.56% on Friday. There will be no cash trading of Treasuries in the Asia session on Monday with Japan shut

Commodities

• West Texas Intermediate crude rose 1.3% to $74.70 a barrel
• Gold gained 0.6% to $1876.90 an ounce