Asian stocks poised for weekly gains on rate cut wagers, AI fervour

Global equities, including MSCI Asia-Pacific, reached record highs, driven by investor confidence in impending Federal Reserve rate cuts, despite a largely shrugged-off U.S. government shutdown. Markets are nearly fully pricing in a 25 basis point Fed cut in October, which has weakened the dollar to its biggest weekly drop since August, propelled gold to near-record levels, and strengthened the yen, even as the shutdown delays crucial economic data for the data-dependent Fed.

Analysis

Global equity markets are exhibiting strong bullish sentiment, with major indices in Asia (MSCI Asia-Pacific +2.3% weekly), Japan (Nikkei +1.5%), and the U.S. reaching record highs. This rally is primarily fueled by investor conviction that the Federal Reserve will initiate a rate-cutting cycle, with markets almost fully pricing in a 25 basis point reduction in October. The optimism is currently overshadowing concerns related to the U.S. government shutdown, which has delayed crucial economic data, complicating the Federal Reserve's data-dependent policy approach. This monetary policy outlook is exerting significant pressure on the U.S. dollar, pushing the dollar index toward its largest weekly decline since August. Consequently, gold has surged to near-record highs, up over 2% for the week and 47% year-to-date, reinforcing its status as a safe-haven asset in a low-interest-rate environment. In contrast, oil prices are diverging, on course for their steepest weekly decline in over three months, indicating that the positive sentiment is not uniformly lifting all commodity classes.

Key Decisions for Investors

• Given that equity markets are running on expectations of a Fed easing cycle, investors should maintain a constructive but cautious stance, recognizing that the delay in official economic data increases market sensitivity to alternative indicators and central bank commentary.
• Consider positioning for continued U.S. dollar weakness, which can be expressed through allocations to gold, as the metal is demonstrating strong momentum and benefiting from both falling rate expectations and its role as a diversifier against U.S. fiscal uncertainty.
• Monitor the duration of the U.S. government shutdown, as a prolonged stalemate could erode investor confidence, and note the significant divergence between strong gold performance and weak oil prices, suggesting selectivity is required within commodity allocations.