Stocks Hold Tight Ranges as Traders Eye Fed Pause Prospects

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Asian stocks rallied on Tuesday as weaker US economic data strengthened speculation that the Federal Reserve (Fed) may forego rate hikes at next week’s meeting. The MSCI’s broadest index of Asia-Pacific stocks outside Japan rose 0.17%, reversing previous losses, and the Tokyo Nikkei Stock Average (.N225) rose 0.65%. 

Futures markets showed a calm start for European stocks, with Eurostox 50 futures down 0.05%, German DAX futures down 0.06% and FTSE futures down 0.04%.  Australia’s S&P/ASX200 index (.AXJO) fell 1% and the Australian dollar rose 1% after the Australian central bank raised interest rates by a quarter of a percentage point to its highest level in 11 years. 

The Reserve Bank of Australia also warned that further tightening may be needed to ensure inflation returns to target. “If May’s decision to hike was ‘finely balanced’, then today’s hike should have been a no-brainer given their monthly inflation gauge ripped higher and around a quarter of Australia’s workforce is about to receive a bumper pay rise,” said Matt Simpson, senior market analyst at City Index. 

The RBA’s move sets the stage for a slew of monetary policy decisions from major central banks across the globe, with the Fed, the European Central Bank and the Bank of Japan due to hold their policy meetings next week. A string of economic data along with last week’s dovish rhetoric from Fed officials has emboldened bets of the Fed refraining from an interest rate hike at its June 13-14 meeting. 

Markets are now pricing in an 82% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool. Data overnight showed that the U.S. services sector barely grew in May as new orders slowed, pushing a measure of prices paid by businesses for input to a three-year low, which could aid the Fed’s fight against inflation. 

The services industry accounts for more than two-thirds of the U.S. economy. “The index sends another signal that demand is cooling and that the cumulative tightening is working through the economy, giving room to the Fed to pause in June to assess conditions further,” said Saxo Markets strategists in a note to clients.


Data on Friday showed U.S. nonfarm payrolls rose by 339,000 jobs in May, but a surge in the unemployment rate to a seven-month high of 3.7% suggested an easing in labour market conditions. “The tactical risk for equity investors in the very near term is that the Fed indeed skips a meeting and raises rates in July and not June,” said Gary Dugan, CIO of Dalma Capital. 

“The vibrancy of growth, the debt ceiling as an issue out of the way now, and a slow-moving Fed might just trigger a further rally in equities.” Over in China, rising expectations of policy easing to aid the sluggish economic recovery as well as “candid” talks between senior U.S. and Chinese officials helped lift sentiment. Hong Kong’s benchmark Hang Seng Index (.HSI) rose 0.68% while the Shanghai Composite Index (.SSEC) fell 0.09%. 

Oil markets lost most of their gains in previous trading as prices fell as world’s largest exporter Saudi Arabia announced further production cuts. On the day, US crude fell 0.26% to $71.96 a barrel, while Brent crude fell 0.17% to $76.58.  Saxo strategists said recession fears, a Fed rate cut or clear signs of stimulus could be needed to change sentiment in the energy market. 


“However, as OPEC focuses on ensuring market stability, the risk of market tightening in the second half of the year remains.”


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