Japan leads Asian stocks higher after holiday

Asian stocks climbed, with equity benchmarks in Japan rising after a holiday as a weaker yen is seen providing support for exporters.

Shares also advanced in South Korea. MSCI’s Asia-Pacific stock index traded at its highest level since Aug. 5, after its recovered from last week’s rout. The S&P 500 closed steady as traders look toward key US economic data later this week. Treasuries steadied after advancing amid concern of geopolitical risks.

Oil remained near the $80 level it hit on Monday, as the US sees an Iranian attack against Israel as increasingly likely. Israel’s sovereign debt was cut by one notch by Fitch Ratings, which kept a negative outlook on the credit as continued military conflict weighs on the country’s public finances.


“Volatility could return this week,” said Solita Marcelli at UBS Global Wealth Management. “If inflation is too low, this may heighten concerns that the US may be heading for a recession. If inflation is too high, it could encourage fears that the Federal Reserve may be unable to cut rates quickly enough to protect the economy. Geopolitical risks also remain elevated.”


After last week’s turmoil, markets will be focused on Wednesday’s consumer price index to see if the Fed will have a freer or more constrained hand in refocusing on the labor market and front-loading rate cuts sufficiently to secure a “soft landing,” according to Krishna Guha at Evercore.

“But do not panic if CPI is on the hotter side,” Guha noted. “This is now a labor-data first Fed, not an inflation-data first Fed, that is less data-point dependent, more forward-looking. We think if coming labor data stays soft, the Fed will still be forward-leaning on cuts.”

Elsewhere in Asia, regulators told commercial banks in China’s Jiangxi province not to settle their purchases of government bonds, taking some of the most extreme measures yet to cool a market rally that has alarmed Beijing. At least four Chinese brokerages have started fresh measures to cut back trading of domestic debt beginning last week, people familiar with the matter said.

Meanwhile, India’s inflation eased below the central bank’s target for the first time in nearly five years, though it is unlikely to spur interest rate cuts just yet as policymakers want to see a sustained decline in prices.

Risk-Reward

The risk-reward for stock markets remains mixed over the summer months against the backdrop of weakening business activity and negative earnings revisions, according to JPMorgan Chase & Co. strategists led by Mislav Matejka.

“Fed will start cutting, but this might not drive a sustained leg higher, as the cuts might be seen as reactive, and behind the curve,” they wrote.

Investors will have a brief window to buy the dip in US stocks at the end of this month as selling pressure from systematic funds eases while companies boost share buybacks, according to Scott Rubner at Goldman Sachs Group Inc.

More near-term dips can’t be excluded if activity data surprise negatively, but investors should buy stocks on weakness as fundamentals are still supportive of risk assets, HSBC strategists say.