Asian stocks followed the path of Wall Street's recovery, as investors looked beyond Joe Biden's end to his re-election campaign, focusing instead on the start of the technology companies' earnings season. The MSCI Asia index halted its three-day decline, with stocks in Taiwan and Japan rising. Hong Kong stocks fluctuated at the open. This came after a 1.1% increase in the S&P 500 index ahead of the earnings announcements from Tesla and Alphabet, scheduled to be released later today, Tuesday. A sense of calm returned to the markets after high valuations and political uncertainties led to aggressive selling, particularly in technology stocks, over the past few sessions. Even with the multiple headlines following Biden's decision to withdraw from the race and endorse Kamala Harris, volatility in the United States decreased as buyers emerged on dips.
Risk Sentiment
Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank in Singapore, stated: “Risk sentiment appears strong with Democrats supporting Kamala Harris, or at least she is getting close to that support.” He added: “What remains now is to see if the upcycle will yield gains from the 'Magnificent Seven,' to broaden to include small-cap stocks.” Robert Kapito, Head of BlackRock, the world’s largest asset management company, mentioned that the stock market is ready to benefit as investors allocate their massive cash holdings.
U.S. Treasury yields dropped ahead of this week’s data on the economy, as well as the Federal Reserve's preferred inflation index. Throughout most of July, bets on rate cuts in September led to a rise in short-term bonds, narrowing the gap with longer maturities. The Japanese yen slightly increased, hovering around 157 yen to the dollar ahead of the Bank of Japan's policy meeting next week. Bank of Japan officials believe that weak consumer spending will complicate their decision on raising interest rates this month, according to informed sources. Australian bond yields rose, while the currency changed little after a six-day decline as commodity prices fell. The U.S. dollar remained stable in early Asian trading.
Elsewhere in Asia, Indian Finance Minister Nirmala Sitharaman will present the budget today, outlining the economic priorities of the new coalition government led by Prime Minister Narendra Modi.
Investors Await Earnings Reports
The earnings expected to be announced in the region this week include those from SK Hynix Inc, Contemporary Amperex Technology Co, and Keyence Corp. Nearly two-thirds of participants in a Bloomberg Markets Live Pulse survey expect earnings to energize the U.S. index. The Magnificent Seven index rose over 2% on Monday, led by gains from Tesla and Nvidia.
After leading the rise in U.S. stocks for most of the year, major technology companies hit a wall last week. Investors shifted from strongly rising mega-cap stocks to more risky and underperforming stocks, driven by bets on Federal Reserve rate cuts and the threat of further trade restrictions on chip-making companies. Strategists at the BlackRock Investment Institute express their confidence in the outlook for U.S. stocks, even though the S&P 500 recorded its worst week in three months.
The decline in U.S. inflation contributes to reassuring the Federal Reserve. The path to the Federal Reserve lowering interest rates becomes clearer next week, amid new signs of easing inflation and slowing economic activity. A team of strategists led by Wei Li stated in a note that the declines represent “an opportunity to move into stocks.” They added that “considering the short-term noise” regarding the rise in small-cap stocks, it is likely that big technology companies will continue to deliver returns, favorably impacting the markets.
Earnings estimates for the S&P 500 have not declined in the second quarter to the same extent as previously, according to strategists at JPMorgan, indicating limited room for disappointment in the current earnings season. A team led by Mislav Matejka noted that forecasts typically decrease by 5% in the three months prior to results, but this time the reduction was around 1%.
In the commodities market, oil prices stabilized near a six-week low as traders awaited new evidence on market balances, including forecasts for U.S. inventories.
