Asian stocks clock weekly gains on rate cut wagers, AI fervour

Global markets, including Asian stocks and the S&P 500, are demonstrating resilience and reaching record highs despite an ongoing U.S. government shutdown, primarily driven by increasing investor confidence in near-term Federal Reserve rate cuts, with a 25 basis point cut in October almost fully priced in. This expectation has pressured the U.S. dollar, leading to its largest weekly decline since early August, while safe-haven gold has surged to record highs. However, the shutdown's delay of crucial economic data is forcing the Fed to rely on less comprehensive indicators, potentially increasing short-term market volatility.

Analysis

Global equity markets are demonstrating significant resilience, with the S&P 500 and MSCI's Asia-Pacific index reaching record highs despite the ongoing U.S. government shutdown. Investor focus is overwhelmingly directed towards the prospect of a near-term Federal Reserve rate-cutting cycle, which is outweighing concerns about the fiscal deadlock. Markets are almost fully pricing in a 25 basis point rate cut in October and a total of 114 bps of easing by the end of 2026. This monetary policy expectation is exerting direct pressure on the U.S. dollar, which is set for its largest weekly decline since early August, consequently benefiting the Japanese yen. In commodities, this has created a stark divergence: gold has surged to a record high, climbing 2.6% for the week and 47% year-to-date, fueled by its safe-haven status and the low-rate outlook. Conversely, oil prices are poised for their steepest weekly drop since late June on expectations of an OPEC+ supply increase. A key risk emerging from the shutdown is the suspension of crucial economic data releases, forcing the data-dependent Fed to rely on less comprehensive indicators and potentially fueling short-term volatility as market visibility is reduced.

Key Decisions for Investors

• Given the market's strong conviction in impending Fed rate cuts, investors should assess positioning in assets sensitive to a lower interest rate environment and a weaker U.S. dollar.
• The pronounced divergence between gold and oil suggests considering long exposure to gold (GLD) as a hedge against uncertainty and a play on lower rates, while exercising caution on oil (USO) due to emergent oversupply risks.
• Prepare for heightened short-term market volatility as the government shutdown delays key economic reports, making it prudent to monitor alternative data like jobless claims for directional cues.
• The continued leadership of AI-related technology stocks remains a powerful market driver, indicating that maintaining exposure to this theme is critical for capturing upside momentum in major indexes.