Markets Rally on China’s Repo Rate Cut and Growth Optimism

Sydney: Asian stocks edged higher on Monday ahead of key central bank meetings and U.S. inflation data, both of which are expected to result in further rate cuts. China’s central bank unexpectedly reduced its 14-day repo rate by 10 basis points, which supported a 0.5% rise in Chinese blue-chip stocks. This came days after the bank disappointed markets by keeping long-term rates unchanged.

A public holiday in Japan led to reduced trading volumes, with MSCI’s broadest index of Asia-Pacific shares outside Japan adding 0.2%, following a 2.7% gain the previous week. Although Tokyo’s Nikkei was closed, futures trading showed a rise to 38,530, compared to a cash close of 37,723. Last week, the index surged 3.1%, driven by the Bank of Japan’s decision to maintain its loose monetary policy stance.

In European markets, EUROSTOXX 50 futures rose 0.3%, while FTSE futures gained 0.1%. Meanwhile, U.S. S&P 500 futures increased by 0.3%, and Nasdaq futures climbed 0.5%. Despite September being historically weak for stocks, the S&P has gained 1% so far this month and is up 19% year-to-date, reaching record highs. Trading activity in U.S. markets surged on Friday, with over 20 billion shares changing hands, marking the busiest session since January 2021.

Bank of America analysts noted that the S&P typically rises by an average of 21% in the 12 months following the beginning of Federal Reserve rate cuts, provided there is no recession. The Federal Reserve’s recent half-point rate cut has buoyed markets, with futures suggesting a 50% chance of another substantial cut in November.

Barclays economist Christian Keller highlighted the significance of the Fed’s move, noting that initiating a rate cut cycle with a 50-basis-point reduction, absent a financial crisis, is unusual. He emphasized that the Fed’s action signals a strong commitment to avoiding labor market deterioration, aiming for what is known as a “soft landing” for the economy.

This week, several Fed officials, including Chair Jerome Powell, are scheduled to speak, offering further insights into the central bank’s future plans. The key economic indicator to watch will be the core personal consumption expenditures (PCE) data due on Friday. Analysts predict a 0.2% month-on-month increase, bringing the annual rate to 2.7%, while the headline index is expected to slow to 2.3%.

Globally, the Swiss National Bank is anticipated to lower rates by 25 basis points on Thursday, with a 41% chance of a 50-basis-point cut. Similarly, Sweden’s central bank is expected to ease by 25 basis points on Wednesday. However, the Reserve Bank of Australia is forecast to keep rates steady at 4.35% during its meeting on Tuesday, as inflation remains persistent.

Investors are also monitoring the U.S. government’s funding situation, with just days left before the current $1.2 trillion budget expires on September 30. Republican Speaker Mike Johnson proposed a three-month stopgap funding bill on Sunday, which now faces a vote.

In currency markets, the dollar gained 0.3% to reach 144.35 yen, following a 2.2% rise last week. The euro remained stable at $1.1160, after a nearly 3% gain against the yen last week. Meanwhile, Japan’s Liberal Democratic Party is set to elect a new leader on September 27, with the winner replacing outgoing Prime Minister Fumio Kishida.

Gold prices remained near record highs, trading at $2,620 an ounce, buoyed by the U.S. rate cut and lower bond yields. Oil prices continued to firm, with Brent crude rising by 40 cents to $74.89 per barrel, and U.S. crude up by 39 cents to $71.39, following last week’s 4% rally driven by hopes that lower borrowing costs will boost global economic growth.