Asian shares make cautious gains as beaten-down Treasuries find support

Asian shares saw tentative gains Friday as U.S. Treasury yields stabilized after the House passed Trump's tax cut bill, which is projected to add $3.8 trillion to the national debt over the next decade. Despite Moody's recent U.S. credit rating downgrade and ongoing debt concerns, 30-year Treasury yields retreated from a 19-month high. In Asia, Japanese government bond yields remained near all-time highs, while the dollar weakened and oil prices declined on expectations of increased OPEC+ output.

Analysis

Global markets exhibit a mixed sentiment as Asian shares posted tentative gains, yet the MSCI’s broadest index of Asia-Pacific shares outside Japan is poised for a 0.4% weekly loss. This follows a period where U.S. Treasuries found buyers, evidenced by 30-year bond yields retreating 1 basis point to 5.037% from a 19-month high of 5.161%, despite the U.S. House passing a tax cut bill projected to add $3.8 trillion to the $36.2 trillion national debt over ten years and a recent U.S. credit rating downgrade by Moody's. U.S. business activity showed an uptick in May, contrasting with weak European PMI data that pressured European shares. Consequently, Wall Street closed largely flat, with Nasdaq and S&P 500 futures also neutral. The U.S. dollar is trending towards a 1.2% weekly decline against major peers, while the euro gained 0.2% to $1.1302, marking its first weekly rise in four weeks. Federal Reserve Governor Christopher Waller indicated potential rate cuts later this year, contingent on U.S. tariff policy outcomes. In Japan, accelerating core inflation, the fastest in over two years, supported a 1% rise in the Nikkei, while 30-year JGB yields neared all-time highs, jumping 23 basis points this week to 3.175%. Commodity markets saw oil prices decline for a fourth session, with U.S. crude at $60.76 a barrel, on expectations of increased OPEC+ output. Conversely, gold prices are set for a 2.8% weekly gain, trading flat at $3,292 an ounce, and Bitcoin is poised for a 7% weekly gain at $111,524 after hitting a record $111,965.

Key Decisions for Investors

• Investors should closely monitor U.S. Treasury yields and the broader sovereign debt market, given that the recent stabilization may be temporary in light of significant fiscal expansion ($3.8 trillion projected debt increase) and concerns about global bond supply.
• The divergence in economic activity between the U.S. (stronger PMI) and Europe (weaker PMI), alongside a weakening dollar (down 1.2% weekly), suggests a cautious approach to European equities and potential opportunities in currency markets.
• Consider the potential for U.S. Federal Reserve rate cuts later in the year, which are dependent on tariff policy developments, as this could significantly influence fixed income, equity valuations, and currency strategies.
• Evaluate positions in the energy sector carefully due to falling oil prices driven by anticipated OPEC+ production increases, while noting gold's 2.8% weekly appreciation as a potential indicator of flight to safety or inflation hedging amidst market uncertainties.