Hopes of dovish Fed boost Asian stocks as grain leaps

Singapore — Asian stock markets climbed cautiously on Monday amid hopes that the Federal Reserve might sound less aggressive about rate hikes this week, while wheat prices leapt after Russia withdrew from a pact allowing Ukrainian grain to transit the Black Sea.

Gains in Hong Kong, Australia and Korea pushed MSCI's index of Asia-Pacific shares outside Japan up 0.8%. But China stocks fell following weak economic data, and the MSCI index is set for a tenth consecutive monthly loss. Japan's Nikkei rose 1.5%.

The performance follows a Friday rally on Wall Street but comes with bond and currency markets tempering some wagers on a change in tone from the Fed. The dollar, after posting two weeks of losses, steadied on Monday and rose 0.5% on the yen.

“Things had got too pessimistic,” said Jun Bei Liu a portfolio manager at Tribeca Investment Partners in Sydney, of the stocks rally. Recent drops in US tech giants perhaps signal enough bad news is already in the price, she added.

“The valuation crunch for a lot of those companies is already done … we're already getting earnings downgrade, and now the market is starting to look attractive in certain sectors.”

Treasuries fell on Friday and slipped a little further in Asia trade, with benchmark 10-year yields up three basis points to 4.0392%. S&P 500 futures fell 0.2%.

Chicago wheat futures leapt more than 8% to a two-week high of $8.93 a bushel in early trade, before settling back to $8.78, after Russia's withdrawal from a deal to allow Ukrainian grain shipments to reach global buyers.

Double digits

Under the UN-backed deal, Turkish, Russian and Ukrainian officials co-ordinated the movement of ships. No ships moved on Sunday, but the UN said it had agreed with Ukraine and Turkey on a movement plan for 16 vessels on Monday.

“Depending on the scramble to replace planned Ukraine cargoes, prices might even head into double digits for a period,” said Commonwealth Bank of Australia strategist Tobin Gorey. Corn futures rose 2%.

The main focus this week will be on the Federal Reserve meeting on Tuesday and Wednesday and US jobs data on Friday, though in Asia there will also be attention on Chinese economic activity data this week and the Reserve Bank of Australia's Tuesday meeting.

China's factory activity unexpectedly fell in October, an official survey showed on Monday, helping knock the Shanghai composite 0.3% lower.

The resignation of the chair of Beijing-based property developer Longfor Group also unnerved investors, with shares down 40% in Hong Kong and the sector under pressure.

The Fed is all but certain to raise rates by 75 basis points on Wednesday, with markets focused on the communication of the outlook.

Tempered optimism

A Wall Street Journal article two weeks ago, flagging a possible discussion about slowing hikes, seemed to trigger optimism about a shift in tone. But a report from the same author at the weekend pointed to a lengthy period of high rates.

Rates and Fed funds futures traders have now tempered initial optimism and see the funds rate hitting near 5% by May next year. The dollar has also paused a retreat.

It rose to ¥148.04 and was firm at $0.9948 per euro early in the Asia session. Brent crude futures hovered at $95.46 a barrel. Spot gold held at $$1,641 an ounce.

“The Fed is going to struggle at their November meeting to stick the landing between signalling that the pace of rate hikes may not be sustainable while also trying to lean against the kind of rally we are now seeing,” said NatWest markets' currency strategist Brian Daingerfield.

“I expect the net result to be another very hawkish Fed communication, with perhaps a clear intention on oversignalling.”

Reuters