Markets rally, dollar dips as US data tempers rate fears
Asian markets rallied Tuesday and the dollar eased after weak US factory data sparked optimism that a series of big interest rate hikes were taking their toll, allowing the Federal Reserve to ease its foot off the pedal.
Oil also continued to rise on expectations OPEC and other major producers will slash output this week, having become spooked by a plunge in the commodity on recession fears.
All three main indexes in New York enjoyed a bumper start to the quarter after data showed US manufacturing growth slowed more than expected in September to its weakest in more than two years.
SPI Asset Management’s Stephen Innes said: “The positive aspect in the data is prices paid dropped to 51.7, the lowest print since June 2020, triggering a mini-risk revival in stocks and a sell-off on the US dollar as US yields continued to slide.
“In this hawkishly priced risk environment, bad data is considered good news, as it raises the possibility of a doveish pivot by the Federal Reserve.”
But he added that there was a lot more data to come this week, topped by Friday’s US jobs figures, that could alter investors’ views, while several Fed officials remained wedded to their rate hike plan to tame inflation.
Nicole Webb, at Wealth Enhancement Group, told Bloomberg Television that while the Fed will at some point stop hiking, “how long they hold us or suspend us there is still in question”.
Still, Asian markets built on the Wall Street surge.
Tokyo and Seoul were among the leaders, despite news that North Korea had fired a missile over Japan for the first time since 2017.
Sydney surged 3.8 percent after the Reserve Bank of Australia lifted interest rates by less than expected.
Singapore, Mumbai, Bangkok, Taipei, Manila, Jakarta and Wellington were also sharply higher. Hong Kong and Shanghai are closed for holidays.
London, Paris and Frankfurt were also well up soon after opening.
Sterling extends gains
The rally in equities came as the dollar weakened owing to lower expectations for US monetary tightening, with the pound also supported by the UK government’s decision to scrap a planned cut in the top rate of income tax.
Ahead of a speech to a conference of the ruling Conservatives, finance minister Kwasi Kwarteng dropped the proposal, which was part of a big-borrowing mini-budget that sent shudders through markets.
The pound extended gains after breaking back above $1.13, having last Monday tanked to a record low $1.0350.
The tax cut would have cost about £2-3 billion out of an estimated £72.4 billion worth of debt issuance this year.
But National Australia Bank’s Tapas Strickland said the u-turn “is a sign that the government is responding to market concerns and also to polling which may mean the new government is not as cavalier as some had feared”.
The dollar was also down against the euro and yen, while the Australian dollar overcame an initial drop after the RBA’s rate hike to push higher.
Commodities traders are keenly awaiting Wednesday’s monthly meeting of OPEC and other producers after reports said it is considering a million-barrels-a-day output cut.
WTI surged more than five percent Monday and Brent was up 4.4 percent, recovering some of the huge losses suffered in recent months because of fears about demand caused by an expected recession.
The jump was also helped by the weaker dollar, which makes the so-called black gold cheaper for buyers using other currencies.
A cut would deal an extra blow to central banks trying to fight decades-high inflation, which has partly been driven by the spike in crude markets stoked by Russia’s invasion of Ukraine.
But SPI’s Innes added OPEC could justify the move by pointing to the recent drop in prices, which are down about 40 percent from June.
