By Wayne Cole
SYDNEY (Reuters) – Asian stock markets rose on Monday as investors looked to a rate cut in Europe, and possibly Canada, as the next step in global policy easing, although persistent inflation threatens to make the process a drawn-out affair.
The European Central Bank (ECB) is believed to cut interest rates by a quarter of a percentage point to 3.75% on Thursday, the first time in history it has eased ahead of the US Federal Reserve.
However, surprisingly high inflation in the eurozone last week dampened hopes for a quick round of cuts and markets have priced in a 55 basis point easing this year.
“The likelihood of subsequent cuts now appears very low, leaving the focus on a second step in September,” said Bruce Kasman, head of economic research at JPMorgan.
“We suspect that President Christine Lagarde will signal a downward direction for interest rates next week, but the policy statement will emphasize that future moves are data-driven and that there is no prior commitment to a particular interest rate path.”
Markets also imply about an 80% chance that the Bank of Canada will make cuts at its meeting on Wednesday and an easing of 59 basis points this year, although analysts hope the easing will be even deeper.
Investors are a lot less forgiving of the Fed and see little prospect of action until September, and even that is far from a done deal.
The outlook could change this week as data includes key surveys on services and manufacturing, and the May payrolls report, which puts unemployment at 3.9% with 190,000 net new jobs created.
The prospect of lower borrowing costs globally was generally positive for equities, although disappointing economic news from China dampened sentiment somewhat in Asia.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3% after falling 2.5% last week.
Japan’s Nikkei rose another 1.0% after recovering from a one-month low on Friday.
Indian markets are waiting to see whether Prime Minister Narendra Modi will expand his alliance’s majority in parliament when election results are announced on Tuesday, amid speculation it would lead to more economic reforms.
To end the month, Wall Street staged a late rally on Friday, sending the Nasdaq up nearly 7% for May. Early Monday, S&P 500 futures were up 0.2%, while Nasdaq futures were up 0.1%.
In the forex markets, the Japanese yen remains the weakest of the major currencies, although the government is clearly willing to spend heavily to slow its decline. Data last week showed that Tokyo spent 9.788 trillion yen ($62.27 billion) on currency intervention between April 26 and May 29.
The dollar stood at 157.15 yen, just off last week’s peak of 157.715. The euro held steady at $1.0852, continuing to benefit from the EU inflation report, but is meeting resistance at $1.0895. [FRX/]
Gold was steady at $2,326 an ounce after rising for four months in a row, helped in part by buying from central banks and China. [GOL/]
Oil prices initially fell after OPEC+ agreed on Sunday to extend the bulk of oil production cuts until 2025, although some cuts will be reversed from October 2024. [O/R]
Brent fell 26 cents to $80.85 a barrel, while U.S. crude fell 22 cents to $76.77 a barrel.
($1 = 157.1900 yen)
(Reporting by Wayne Cole; Editing by Jamie Freed)
