SINGAPORE, Sept 8 (Reuters) - Stock markets experienced a notable uptick on Monday, while the U.S. dollar faced volatility following dismal labor data from the United States, which solidified expectations for an interest rate cut this month. Concurrently, the Japanese yen weakened as investors braced for political uncertainty in Japan after the resignation of Prime Minister Shigeru Ishiba.
Gold prices remained near record highs, and U.S. Treasury yields hovered near five-month lows after data revealed that the world's largest economy created far fewer jobs than anticipated in August. This information prompted markets to speculate about the possibility of a substantial rate cut by the Federal Reserve. The focus last week was primarily on elevated long-end bond yields globally, as investors expressed concerns regarding the financial health of various nations, including Britain, France, and Japan.
With Ishiba's resignation on Sunday, political uncertainty has engulfed Japan, the world's fourth-largest economy, complicating the policy trajectory for the Bank of Japan. Investors are particularly anxious about who will replace Ishiba, with potential candidates like Liberal Democratic Party veteran Sanae Takaichi, who has openly criticized the BOJ's interest rate hikes, being in the mix. This uncertainty has already put pressure on yields for super-long Japanese government bonds (JGBs), which are nearing record highs, while Japan's Nikkei share index has recently dipped from last month's all-time peak.
According to Kyle Rodda, a senior financial market analyst at Capital.com, "The markets are going to frame this around what it means for fiscal policy, inflation, and the BOJ's response." He suggested that the yen might weaken slightly, which could potentially boost stock markets, although this depends on achieving some leadership stability first.
The anticipation of an interest rate cut by the Federal Reserve later this month has supported stock markets while concurrently weighing on Treasury yields and the value of the dollar. In early Asian trading on Monday, S&P 500 futures indicated a 0.19% increase after a volatile session on Friday, where the index reached a record high before closing 0.3% lower. European futures also advanced by 0.45%.
The U.S. two-year yields, which are sensitive to interest rate policy, rose by 2 basis points to 3.527%, remaining close to the five-month low of 3.464% observed on Friday. Market participants are closely watching the U.S. inflation report scheduled for Thursday, as it will provide insights into the potential risks of rising prices that could temper enthusiasm for a larger rate cut.
Despite a general consensus on a 25-basis-point cut during the September Fed meeting, market attention is shifting towards the possibility of a more significant move, with a 50-basis-point cut now under consideration. Harun Thilak, head of global capital markets North America at Validus Risk Management, noted that traders have fully priced in a 25 bp cut this month, with an 8% chance of a larger 50 bp cut, according to the CME FedWatch tool. They are also anticipating an easing of 68 basis points by the end of the year.
George Boubouras, head of research at K2 Asset Management, stated, "The Fed has more than enough reasons and will cut by 25 bps... with another two cuts within six months." He emphasized that U.S. cash rates are significantly higher than those in other developed markets, suggesting that lower rates are now necessary given the robust state of the U.S. economy.
In the currency market, the euro dipped to $1.1713 after a 0.6% surge on Friday, while the British pound was last seen at $1.3492 following a 0.5% rise. Attention is also directed towards France, where Prime Minister Francois Bayrou faces a confidence vote on Monday, which he is expected to lose, deepening the political crisis in the eurozone's second-largest economy.
In commodities, gold prices were recorded at $3,588 per ounce, just shy of the milestone $3,600 mark. Gold has seen a remarkable increase of 37% this year, building on a 27% rise in 2024. Meanwhile, oil prices have risen following an agreement by OPEC+ to slow the pace of output increases starting in October, anticipating weaker global demand. Both Brent crude and U.S. West Texas Intermediate crude rose approximately 1% each.
Reporting by Ankur Banerjee; Editing by Jamie Freed and Shri Navaratnam.
