Asian stocks advanced on Monday after China’s support for its equities market revived positive sentiment and as Jerome Powell said the Federal Reserve would “proceed carefully” on whether to raise interest rates again, while signaling policy will remain tighter for longer.
China Cuts Stamp Duty, Pledges to Slow IPOs
China announced measures to support the equities market, lowering the stamp duty on stock trades for the first time since 2008 and pledging to slow the pace of initial public offerings. The move came after data on Sunday showed a decline in industrial profits eased while deflation risks remain an overhang. The Shanghai Composite Index rose 1.2% and the CSI 300 Index gained 1.5%, while the Hang Seng Index added 0.8% in Hong Kong.
The stamp duty cut is seen as a signal that Beijing wants to boost market confidence and liquidity amid a slowing economy and trade tensions with the US. The reduction in IPOs is also expected to ease the pressure on existing shares from new supply. However, some analysts cautioned that the measures may not be enough to sustain a long-term rally, as structural issues such as high leverage and regulatory uncertainty still weigh on the market.
Powell Signals Fed Will Raise Rates If Needed, Keep Them High
Federal Reserve Chair Jerome Powell said the US central bank is prepared to raise rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the 2% target. He also suggested officials could hold rates steady in September, as investors expect. Powell’s remarks at the Jackson Hole symposium on Friday were seen as dovish by some market participants, as he acknowledged the risks from the delta variant of the coronavirus and the uncertainty over the inflation outlook.
Powell’s speech boosted US stocks and weakened the dollar on Friday, as he indicated that the Fed will not rush to tighten monetary policy. However, bond yields rose after his speech, as he also signaled that policy will remain restrictive for longer. The yield on two-year bonds, which are highly sensitive to the Fed’s policy shifts, are comfortably above 5% while the rate on 10-year Treasuries fluctuated near 4.2%. The dollar index fell 0.4% on Friday and was little changed on Monday.
Asian Markets Follow US Lead, Await More Data
Asian stocks followed US equities with modest gains on Monday, as Powell’s speech eased some concerns over the Fed’s policy stance and China’s stimulus measures supported regional sentiment. Equity futures for Japan, Hong Kong and Australia all pointed to small gains of less than 1% following the S&P 500 ’s 0.7% advance Friday, when it capped its best week since July. Contracts for US benchmarks opened higher Monday.
Investors in Asian markets will be watching for more economic data this week, including China’s official manufacturing and non-manufacturing purchasing managers’ indexes for August, Japan’s industrial production and retail sales for July, and Australia’s second-quarter gross domestic product. The data will provide more clues on how the region is coping with the impact of the delta variant and the policy responses from governments and central banks.