Japanese stocks rose alongside Hong Kong equity futures, while shares in Sydney were little changed. US contracts edged lower ahead of Wall Street reopening later Tuesday, following the Labor Day public holiday.
The yen was slightly higher after weakening against the greenback Monday, amplifying its decline over the past week.
The Japanese currency will remain weak for “a long time to come,” given the differences in interest rates between the US and Japan, according to Mark Matthews, head of Asia research for Julius Baer.
“Our assumption is that the Bank of Japan policy rate will be half a percent by March next year and the fed funds rate will be 4.5% — that’s still 400 basis points of difference, which is very wide,” Matthews said in an interview on Bloomberg Television. “On that basis we do see the yen weakening.”Traders in Asia will be keeping a close eye on fresh signs of economic troubles in China. Data on Saturday showed Chinese factory activity had contracted for a fourth straight month in August, the latest signal that the world’s second-largest economy may struggle to meet this year’s growth target. The slowdown in China has highlighted the urgency of fresh government stimulus, while inventories of key raw materials from steel to soybeans are piling up in the nation’s warehouses — evidence that economic activity remains too feeble to clear surpluses.
While traders globally will approach this month with caution, as data shows September has been a poor month for stocks in recent years, the upcoming US jobs report on Friday could be a factor as to whether history repeats itself. It will provide crucial insights into how quickly or slowly the Federal Reserve might cut rates and as the US election campaign gets into full swing.
Traders are pricing a start to the US easing cycle this month, with a roughly one-in-four chance of a 50 basis-point cut, according to data compiled by Bloomberg. The equity market rally could stall even if the Fed initiates a rate cut, JPMorgan Chase & Co. strategists cautioned, as any policy easing would be in response to slowing growth, while the seasonal trend for September would be another impediment, the team led by Mislav Matejka wrote in a note.
“We are not out of the woods yet,” Matejka said, reiterating his preference for defensive sectors against the backdrop of a pullback in bond yields. “Sentiment and positioning indicators look far from attractive, political and geopolitical uncertainty is elevated, and seasonals are more challenging.”
BloombergJobs data potentially pointing to a very gradual cooling down of the US labor market could lead traders to adjust their expectations for rate cuts to the benefit of the dollar, according to to Valentin Marinov, head of G-10 FX strategy at Credit Agricole CIB.
“The markets may be leaning too dovish into the September Fed meeting,” Marinov said on Bloomberg Television. “The dollar could recoup some ground once the markets realized that the Fed will move more cautiously.”
In commodities, oil edged higher after Libya declared force majeure at a key oilfield amid widening shutdowns that have wiped out close to a million barrels from daily global supplies.