Asian shares extend rally on hopes of Fed rate hike pause as oil jumps

Sydney — Most Asian stock markets extended a global rally on Monday on optimism the Federal Reserve would pause its rate hikes this month after a mixed US jobs report, while oil jumped after Saudi Arabia pledged big output cuts.

Brent oil rose 1% to $76.89 a barrel, giving up some of its earlier gains to as high as $78.73, while US crude climbed 1.2% to $72.61 a barrel, after hitting a session high of $75.06.

Oil prices have recently come under pressure amid heightened concerns about China’s slowing economic recovery.

They rose after Saudi Arabia announced it would cut its output to 9-million barrels per day in July, from about 10-million bpd in May, the biggest reduction in years, while a broader Opec+ deal to limit supply into 2024 also underpinned futures.

“With Saudi Arabia protecting oil prices from sliding too low … we think oil markets are now more prone to a shortfall later this year,” said Vivek Dhar, a mining and energy commodities strategist at Commonwealth Bank of Australia.

“We think Brent futures will rise to $US85/bbl by Q4 2023 even with a tepid demand recovery in China factored in.”

On Monday, MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.2%, while Japan’s Nikkei surged 1.7% to stand above 32,000 for the first time since July 1990.

Hong Kong’s Hang Seng index rose 0.6% while China’s bluechips underperformed with a drop of 0.4%.

S&P 500 futures dipped 0.1% and Nasdaq futures dropped 0.3% in Asian hours, after a strong rally on Friday, driven by a mixed US jobs report, a resolution to the debt-ceiling issue and the prospect of a US rate pause this month.

Little chance

Data on Friday showed US economy added 339,000 jobs last month, higher than most estimates, but moderating wage growth and rising jobless rate led markets to continue to bet on no change in Fed rates this month, with a 75% chance priced in for that, according to CME FedWatch tool.

However, there is about a 70% probability that Fed funds rates would reach 5.25%-5.5% or beyond at the policy meeting in July and little chance of a rate cut by the end of the year.

Treasury yields continued to climb on Monday. Yields on US two-year Treasuries rose four basis points to 4.5449%, on top of a surge of 16.2bps on Friday, and 10-year yields also climbed 3 bps to 3.7215%, after a rise of 8bps on Friday.

Fitch Ratings said the US’ “AAA” credit rating would remain on negative watch, despite the debt agreement.

The US dollar remained elevated on Monday at 104.14 against its major peers, after gaining 0.5% on Friday on the jobs report. The greenback also rose 0.16% on the Japanese yen to 140.17 while the euro eased 0.1% to $0.10698.

Central banks from Australia and Canada will meet this week. Markets see a sizeable chance — about 40% — that the Reserve Bank of Australia (RBA) could surprise with a quarter-point hike on Tuesday, after a minimum wages decision that some economists feared could further stoke inflationary pressures.

The Bank of Canada (BOC) will meet on Wednesday. A majority of economists polled by Reuters expect the BOC to keep interest rates on hold at 4.5% for the rest of the year though the risk of one more rate hike remains high.

Reuters