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

Asian shares saw modest gains as U.S. Treasury yields stabilized after President Trump's tax bill passed the House, despite concerns over the bill's $3.8 trillion addition to the national debt over the next decade. Japan's Nikkei rose 1% following strong inflation data, while super-long Japanese government bond yields remained near all-time highs. The dollar is poised for a weekly decline, while Bitcoin is set for a 7% weekly gain, and oil prices continue to fall amid expectations of increased OPEC+ output.

Analysis

Asian equity markets exhibited cautious gains, buoyed by a stabilization in U.S. Treasury markets after the House of Representatives narrowly passed President Trump's tax bill. This legislative progress, however, is juxtaposed with persistent concerns over U.S. fiscal health, as the bill is projected to add $3.8 trillion to the national debt over the next decade, a situation underscored by Moody's recent downgrade of the U.S. credit rating due to rising debt. U.S. 30-year bond yields retreated to 5.037%, down from a 19-month peak of 5.161%, indicating some buyer interest at these levels, although strategists like Ken Crompton from National Australia Bank suggest this does not necessarily alleviate broader concerns about U.S. bond issuance or global bond supply. Divergent economic signals were also prominent: U.S. May PMI data showed an uptick in business activity, contrasting with weaker European PMI figures. Japan's Nikkei advanced 1% following data indicating the fastest core inflation in over two years, while its super-long government bond yields hovered near all-time highs, with 30-year yields at 3.175%. The MSCI Asia-Pacific ex-Japan index rose 0.1%, but was on track for a 0.4% weekly loss. In currency markets, the U.S. dollar is poised for a 1.2% weekly decline, while Federal Reserve Governor Christopher Waller indicated a potential for rate cuts later in the year, contingent on U.S. tariff policy outcomes. Commodity markets saw oil prices fall for a fourth consecutive session, with U.S. crude down 2.7% for the week to $60.76 a barrel on OPEC+ supply expectations, whereas gold prices are set for a 2.8% weekly gain. Bitcoin also demonstrated strength, targeting a 7% weekly increase.

Key Decisions for Investors

• Investors should closely monitor U.S. Treasury yield movements and fiscal deficit commentary, as the tax bill's passage offers short-term market relief but exacerbates long-term U.S. debt sustainability concerns, as highlighted by Moody's recent downgrade.
• It may be prudent to assess currency exposures, particularly to the U.S. dollar, which is set for a weekly decline, and consider the Federal Reserve's conditional outlook on rate cuts tied to future tariff policies.
• Evaluate positions in interest-rate sensitive assets and commodities, noting the divergence between falling oil prices due to anticipated OPEC+ output increases, rising gold prices, and the strong performance of Bitcoin, while remaining cautious on equities given mixed global PMI data and ongoing U.S. fiscal concerns.