Asia stocks gain, dollar sags as Fed reinforces rate cut expectations

Reuters Tokyo | Updated on July 19, 2019 Published on July 19, 2019

Australian stocks added 0.4 per cent, South Korea's KOSPI rose 0.8 per cent and Japan's Nikkei advanced one per cent   -  Bloomberg

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.3 per cent

Asian stocks gained and the dollar sagged on Friday after a top Federal Reserve official all but cemented expectations of a United States (US) interest rate cut later this month.

New York Fed President John Williams said on Thursday that policymakers need to add stimulus early to deal with too-low inflation when interest rates are near zero and cannot wait for economic disaster to unfold, in a speech read as a strong argument in favour of quick action.

The comments by Williams made it a virtual certainty the Fed would opt to cut interest rates by 25 basis points (bps) at its July 30-31 policy meeting and also fuelled expectations of an even deeper 50 bp reduction.

Financial markets quickly reacted, with futures at one point pricing in almost 70 percent chance of a 50-basis-point cut at the month-end meeting. The odds eased to around 40 percent after the New York Fed clarified later that Williams' speech was not about potential action at the upcoming policy meeting.

Wall Street shares shook off a sluggish start and moved higher overnight thanks to the dovish comments by Williams.

Australian stocks added 0.4 per cent, South Korea's KOSPI rose 0.8 per cent and Japan's Nikkei advanced one per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.3 per cent, squaring the previous day's losses.

The index was up only 0.3 per cent on the week, as riskier assets were partly capped by US President Donald Trump's reiteration of his threat to impose further duties on Chinese imports. The two sides resumed talks recently to try and end a year-long trade war that has rattled financial markets and slowed global growth.

“Dovish Fed policy expectations do provide support for the equity markets, which are set to rebound after suffering losses the previous day. But factors such as US-China trade issues and tensions over Iran are likely to limit the markets' gains,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

The dollar index against a basket of six major currencies stood little changed at 96.778 after losing roughly 0.5 per cent overnight to a two-week low of 96.671 in the wake of comments from the Fed's Williams.

The greenback was up 0.15 per cent to 107.460 yen after the New York Fed tried to clarify Williams' earlier comments, crawling away from a three-week trough of 107.210 marked on Thursday when the currency lost 0.6 per cent against its Japanese peer.

The euro was 0.1 per cent lower at $1.1262 after climbing 0.45 per cent the previous day.

US Treasury yields were lower across the board in light of Williams' dovish views. The 2-year yield was at 1.7908 per cent after touching a two-week low of 1.7520 per cent. The 10-year yield declined to a 10-day trough of 2.023 per cent and was last at 2.045 per cent.

In commodities, US crude oil futures rose 1 per cent to $55.90 per barrel after slumping 2.6 per cent overnight.

Oil prices had fallen on Thursday amid expectations that crude output would rise in the Gulf of Mexico following last week's hurricane in the region.

Spot gold extended the previous day's rally made on the prospects of lower US interest rates and brushed a six-year high of $1,452.60 an ounce, before pulling back a touch to $1,442.25.

Published on July 19, 2019

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