A powerful wave of optimism is sweeping through global markets, with Asian equities climbing in lockstep with Wall Street as weak US labor data cements expectations for an imminent Federal Reserve interest rate cut.
But this bullish tide has met a formidable wall of resistance in China, where a stunning $1.2 trillion stock market rally is now under threat from a nervous government, creating a stark and dramatic divergence in the heart of Asia.
MSCI’s regional stock gauge rose as much as 0.7%, led by strong gains in Japan, as investors cheered the latest sign of a cooling US economy.
But the mood was a world apart in mainland China, where stocks fell more than 2% on the news that financial regulators are now considering a raft of cooling measures to rein in what they see as an dangerously overheated market.
The Powell pivot and the payrolls test
The global rally is being fueled by a simple calculation: a weaker US economy makes a Fed rate cut more likely.
The latest data, which showed US job openings falling to a 10-month low, has traders now almost fully pricing in a September cut and projecting at least two reductions this year.
The data is “another sign that the labor market is slowing down,” wrote Kyle Rodda, a senior market analyst at Capital.com. “The dynamic boosts the case for rate cuts.”
This view was amplified by Fed Governor Christopher Waller, who said on CNBC he would support a quarter-point cut in September. Now, all eyes are on the pivotal US payrolls report due on Friday, a final and crucial test before the Fed’s next meeting.
Economists are projecting a meager 75,000 jobs were added in August, a figure that would mark the weakest stretch of hiring since the pandemic began.
A bond market on a knife’s edge
While equities are rallying, a different kind of drama is unfolding in the bond market.
A key test of investor sentiment is set for Thursday in Japan, where the finance ministry will hold a bond auction amid a backdrop of global debt market turmoil and rising political instability at home.
The 30-year Japanese government bond yield has already surged to a fresh record this week, and traders are concerned that mounting doubts about debt sustainability and sticky inflation could lead to a challenging sale.
Despite the turmoil in government debt, corporate borrowers are finding a market with an insatiable appetite.
A flood of new debt has hit the market this week, with more than $128 billion in sales globally as issuers from Asia, including the State Bank of India, take advantage of record-tight credit spreads to lock in favorable financing.
An ominous call on oil
In the commodities space, a bearish cloud is gathering. Oil dropped for a second day, with global benchmark Brent falling toward $67 a barrel as traders fretted about a potential boost in OPEC+ supplies and rising US stockpiles.
This short-term weakness is being compounded by a dire long-term forecast from Goldman Sachs Group Inc., which is now predicting that Brent is set to drop into the low 50s a barrel next year as a global surplus takes hold.
It is a stark and sobering counterpoint to the unbridled optimism gripping the equity markets.
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