Asia stocks hit 2-week high as Fed talk turns dovish

Asia’s stock markets experienced a boost on Wednesday, accompanied by a retreat in the dollar, as Federal Reserve officials adopted a more dovish tone. This shift in sentiment led traders to revise their expectations for U.S. interest rates, although they remained cautious ahead of U.S. inflation data scheduled for release on Thursday.

The S&P 500 saw gains overnight, while MSCI’s broadest index of Asia-Pacific shares outside Japan reached a two-week high, rising by 1.3% in morning trade. Japan’s Nikkei also climbed by 0.5%. Atlanta Fed President Raphael Bostic’s statement that there may not be a need for further rate increases received applause at the American Bankers Association conference in Nashville. Several other Fed officials have also recently acknowledged that the rise in longer-term yields could help tighten financial conditions and curb inflation, reducing the need for short-term rate adjustments.

As a result, expectations for another rate hike this year have diminished, causing Treasury yields to decline from their 16-year highs. The 10-year yield fell by 12.7 basis points on Tuesday and remained steady in Asia at 4.64%. The Australian and New Zealand dollars reached their highest levels against the dollar since the end of September, while sterling hit a three-week peak. The euro remained near Tuesday’s two-week high at $1.0607. However, traders remained cautious as they awaited the release of U.S. Consumer Price Index (CPI) figures.

Peter Dragicevich, a strategist at cross-border payments firm Corpay, suggested that signs of moderating U.S. inflation could reinforce the more cautious stance of Fed members regarding future policy, potentially exerting further pressure on the dollar. Additionally, a Bloomberg News report indicating that China is preparing stimulus measures to support its economy contributed to the positive market sentiment. However, concerns persisted as giant developer Country Garden warned of potential delays in meeting its offshore payment obligations.

In commodity markets, oil prices have slightly declined since bouncing back on Monday due to concerns over a potential wider conflict following a surprise attack by Palestinian militants on Israel. Brent crude futures stabilized at $87.80 a barrel on Wednesday, after reaching $89 on Monday. European gas prices surged on Tuesday following news of the Middle East violence and further increased due to concerns of sabotage on a gas pipe in Finland. The subsea link connecting Finland with Estonia, which may take months to repair, was shut down on Sunday. Finland’s president stated that the damage was likely the result of “outside activity.” Benchmark Dutch gas reached a seven-month high on Tuesday, settling 14% higher.

Vivek Dhar, an analyst at CBA, highlighted that Europe’s higher-than-usual gas stockpiles and lower-than-normal gas demand provide some buffer, but the region remains exposed to a colder winter and potential LNG imports in the coming months.

Meanwhile, the yen experienced a slight rebound as tensions in the Middle East supported safe-haven assets. U.S. stock futures remained steady in Asia. Samsung shares surged following a smaller-than-expected decline in third-quarter profit, coupled with optimism regarding the memory chip market. Pepsi kicked off the U.S. earnings season with an upbeat report, showing only a small 2.5% dip in volume but an 11% increase in prices. The company’s chief financial officer also expressed confidence in further price rises next year. Sam Rines, managing director at research firm CORBU, noted that “making more money with slimmer volumes is not a horrible outcome” and highlighted Pepsi’s management team’s positive outlook on the current state of the consumer.

Overall, the market sentiment in Asia remains positive, driven by the dovish shift in tone from the Federal Reserve and the potential stimulus measures from China. However, investors are keeping a close eye on U.S. inflation data, which could influence future policy decisions.

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