Asian shares continued their positive momentum on Monday, following gains on Wall Street, leading to an extension of this year's global stock rally. Additionally, the yuan strengthened after China's central bank set a fix for the currency that exceeded expectations.
China's central bank has pledged to take more "forceful" measures to support the economy and is expected to have a new leader soon. This move comes as Chinese blue-chip stocks experienced a 5% decline in the last quarter, while developed markets around the world rallied.
However, analysts at ANZ caution that stimulating an economy facing a significant property slump, high sector debt, and a declining population, as Japan experienced in the 1990s, can be challenging.
In contrast, the Nikkei index in Japan soared almost 20% in the last quarter, driven by hopes that Japanese companies would fill gaps resulting from the decoupling of the United States and China, along with a weak yen. The Nikkei index continued to rise on Monday, reaching near recent peaks.
A survey conducted by the Bank of Japan indicated an improvement in business sentiment in the second quarter. Easing supply constraints and the lifting of pandemic restrictions contributed to an increase in factory output and demand.
The positive sentiment extended beyond Japan, with equities also rising in South Korea, Australia, and China. Hong Kong-listed technology shares showed notable strength.
Asian electric-vehicle manufacturers and related suppliers saw their share prices climb after Tesla Inc. delivered a record number of cars worldwide in the second quarter.
Furthermore, the Bank of Japan's manufacturing sentiment survey revealed improved confidence among major manufacturers, marking the first positive change in nearly two years. Sentiment among non-manufacturers also improved.
While MSCI's broadest index of Asia-Pacific shares outside Japan saw a slight increase of 0.8%, it has been lagging behind Japan's market.
In Asia's early hours on Monday, US equity futures remained flat. The Nasdaq 100 experienced a 2% increase last week, recording its best-ever first half of the year. The S&P 500 reached its highest level since April 2022 and posted its best first half since 2019.
EuroSTOXX 50 futures and FTSE futures both rose by 0.3%. S&P 500 futures and Nasdaq futures remained steady ahead of the July 4th holiday, following a more than 6% gain in June.
The high-performing tech sector may receive another boost from Tesla's announcement of delivering a record 466,000 vehicles in the second quarter, surpassing market estimates.
Market value of the seven largest tech stocks has increased by $4.1 trillion this year, with Apple, Microsoft, and Alphabet alone being worth more than the entire emerging market, according to analysts at BofA.
Traders were encouraged by data showing a moderation in inflation, even at the cost of growth. The personal consumption expenditures price index, one of the Federal Reserve's preferred inflation measures, rose by 0.1% in May. On a yearly basis, the measure slowed down to 3.8%, the smallest annual increase in over two years.
The bond market remained subdued on Friday following a volatile first half for rates. Treasuries stabilized on Monday, while yields on the three-year Australian government bonds, sensitive to policy changes, fell by nearly seven basis points.
Despite the soothing sentiment from a modest downward surprise in US inflation and flat consumer spending, debt markets indicate an 84% chance of a Fed rate hike to 5.25-5.5% this month, with a 60% probability of a further increase by November.
This week, important US data includes manufacturing and services surveys, job openings, and the June payrolls report. Median forecasts suggest a steady unemployment rate, with jobs expected to increase by 225,000 following the surprisingly strong figure of 339,000 in May.
According to economist Michael Feroli from JPMorgan, the data may not be enough to deter the Federal Reserve from further tightening. While a July rate hike seems likely, the Fed may choose to wait for the two subsequent payroll reports before making a decision in September.
Major currencies exhibited narrow ranges against the dollar, with a gauge of the greenback's strength declining by 0.3% on Friday, extending its losses for the year. The yuan strengthened after the People's Bank of China set a fix for the currency that exceeded expectations.
The dollar remains supported against the yen due to expectations of at least one more US rate hike, as the Bank of Japan shows no signs of abandoning its super-easy policies. The dollar stood at 144.51 yen on Monday, slightly weaker than its eight-month peak of 145.07 last week.
The yen, this year's worst-performing G10 currency, exhibited slight weakness. Investors will be watching for potential central bank intervention if the yen weakens further.
At present, the Bank of Japan seems willing to act when officials believe that market conditions are heavily skewed. However, as long as the BOJ maintains its current policy and the Federal Reserve maintains a tight policy for an extended period, a sharp appreciation in the yen is unlikely, according to Sean Callow, senior currency strategist at Westpac Banking Corp.
Gold has struggled recently due to rising global interest rates, with the metal trading at $1,917 an ounce, close to last week's three-month low at $1,892.
China's Caixin manufacturing PMI data revealed ongoing challenges for the world's second-largest economy. Traders will also be monitoring the implications of President Xi Jinping's appointment of a long-serving technocrat as the top Communist Party official in the central bank, which may suggest no drastic policy shifts for now.
Oil prices were marginally lower as the second half of the year began, with traders focusing on demand challenges and a complex supply outlook.
The global equity rally has generated both concern and celebration, as it appears to have disconnected from the deteriorating economic situation. Companies in the Nasdaq 100 have seen their value increase by nearly $5 trillion since the beginning of the year, with the tech-heavy index defying bubble warnings and surging by almost 40%. This growth has contributed to a 16% increase in the S&P 500 so far this year. Megacap stocks have experienced even more significant gains, soaring by 74%.
While historical data shows that a first-half rally of at least 10% in the Nasdaq 100 is typically followed by an average return of around 14% in the second half of the year, concerns over valuations have recently led to a surge in bearish bets against major tech companies.
Today's key events include the Eurozone S&P Global Eurozone manufacturing PMI and the UK S&P Global/CIPS UK Manufacturing PMI.
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Monday, July 3
- U.S. markets close early at 1:00 pm ET
- Sigma Lithium Corporation (SGML) reports earnings
- S&P Global Manufacturing PMI (Jun)
- ISM Manufacturing PMI (Jun)
- Construction Spending (May)
Tuesday, July 4
- U.S. Markets Closed (Independence Day)
Wednesday, July 5
- Factory Orders (May)
- IBD/TIPP Economic Optimism Index (Jul)
- FOMC Meeting Minutes
Thursday, July 6
- Coca-Cola Europacific Partners (CCEP) and Levi Strauss & Co. (LEVI) report earnings
- U.S. Trade Balance (May)
- Challenger Job Cuts (Jun)
- ADP National Employment Report (Jun)
- Job Openings and Labour Turnover Survey (JOLTS) Report (May)
- S&P Global Composite PMI - Final Reading (Jun)
Friday, July 7
- U.S. Nonfarm Payrolls (Jun)
Overall, staying informed about global economic trends, geopolitical events, and market developments is crucial for making well-informed investment decisions. Monitoring key economic indicators, central bank actions, and geopolitical risks can help navigate the ever-changing landscape of the global economy and financial markets.