SYDNEY: Asian shares rallied on Monday as hopes for less aggressive US rate hikes and the opening of China’s borders bolstered the outlook for the global economy.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 2.0 per cent to a five-month top, with South Korean shares gaining 2.2 per cent.
Chinese blue chips added 0.7 per cent, while Hong Kong shares climbed 1.4 per cent. China’s yuan also firmed to its highest since mid-August under 6.8000.
Japan’s Nikkei was closed for a holiday but futures were trading at 26,215, compared with a cash close on Friday of 25,973.
S&P 500 futures added 0.2 per cent and Nasdaq futures 0.3 per cent. EUROSTOXX 50 futures gained 0.6 per cent, while FTSE futures firmed 0.3 per cent.
Earnings season kicks off this week with the major US banks, with the Street fearing no year-on-year growth at all in overall earnings.
“Excluding Energy, S&P 500 EPS (earnings per share) is expected to fall 5 per cent, driven by 134 bp of margin compression,” wrote analysts at Goldman Sachs. “Entering reporting season, earnings revision sentiment is negative relative to history.
“We expect further downward revisions to consensus 2023 EPS forecasts,” they added. “China reopening is one upside risk to 2023 EPS, but margin pressures, taxes, and recession present greater downside risks.”
A sign of the strain came from reports Goldman would start cutting thousands of jobs across the firm from Wednesday, as it prepares for a tough economic environment.
In Asia, Beijing has now opened borders that had been all but shut since the start of the COVID-19 pandemic, allowing a surge in traffic across the nation.
Bank of America analyst Winnie Wu expects China’s economy, the second-largest economy in the world, to benefit from a cyclical upturn in 2023 and anticipates market upside from both multiple expansion and 10 per cent EPS growth.
FING THE FED
Sentiment on Wall Street got a boost last week from a benign blend of solid US payroll gains and slower wage growth, combined with a sharp fall in service-sector activity. The market scaled back bets on rate hikes for the Federal Reserve.
Fed fund futures now imply around a 25 per cent chance of a half-point hike in February, down from around 50 per cent a month ago.
That will make investors ultra sensitive to anything Fed Chair Jerome Powell might say at a central bank conference in Stockholm on Tuesday.
It also heightens the importance of US consumer price index (CPI) data on Thursday, which is forecast to show annual inflation slowing to a 15-month low of 6.5 per cent and the core rate dipping to 5.7 per cent.
“We at NatWest have lower than consensus CPI forecasts, and if right that will likely solidify the market pricing of 25bps vs 50bps,” said NatWest Markets analyst John Briggs.
“In context, it should still be seen as a Fed that is still likely to hike a few more times and then hold rates high until inflation’s decline is guaranteed – to us that means a 5-5.25 per cent funds rate.”
Friday’s mixed data had already seen US 10-year yields drop a steep 15 basis points to 3.57 per cent, while dragging the US dollar down across the board.
Early Monday, the euro was holding firm at US$1.0673, having bounced from a low of US$1.0482 on Friday. The dollar eased to 131.48 yen, away from last week’s top of 134.78, while its index was flat at 103.600.
The Brazilian real had yet to trade after hundreds of supporters of far-right former President Jair Bolsonaro were arrested after invading the country’s Congress, presidential palace and Supreme Court.
The drop in the dollar and yields was a boon for gold, lifting it to an eight-month peak around US$1,877 an ounce.
Oil prices were steadier, after sliding around 8 per cent last week amid demand concerns.
Brent bounced 80 cents to US$79.37 a barrel, while US crude rose 78 cents to US$74.55 per barrel.