Asian Shares Rally On Rate Cut Hopes And Manufacturing Sector Growth

Asian share markets experienced a rally on Monday, as investors anticipated potential interest rate cuts in Europe and Canada, despite persistent inflation concerns. The private Caixin survey indicated a rise in China's main factory index to a two-year high of 51.7 in May, up from 51.4 in April. Japan's factory activity expanded for the first time in a year, while South Korea's activity grew at the fastest pace in two years.

These developments contributed to a 1.4 percent increase in MSCI's broadest index of Asia-Pacific shares outside Japan, which had declined by 2.5 percent the previous week. Chinese blue chips saw a 0.3 percent rise. Japan's Nikkei climbed 1.1 percent after rebounding from one-month lows on Friday, while South Korea gained 1.8 percent.

EUROSTOXX 50 futures rose by 1.0 percent and FTSE futures by 0.8 percent, reflecting a positive market sentiment. South Korean President Yoon Suk Yeol highlighted the potential for significant oil and gas reserves off the country's east coast. Indian markets reached record highs, while month-end flows led to a late rally on Wall Street on Friday, with the Nasdaq up nearly 7 percent for May.

Early Monday trading saw S&P 500 futures up by 0.2 percent and Nasdaq futures adding 0.3 percent. The prospect of lower global borrowing costs has generally been favourable for equities.

The European Central Bank (ECB) is expected to reduce rates by a quarter point to 3.75 percent on Thursday, marking the first time it would ease ahead of the U.S. Federal Reserve. However, last week's high euro zone inflation reading dampened hopes for swift rate reductions, with markets pricing in 57 basis points of easing for this year.

The Bank of Canada is also likely to cut rates at its meeting on Wednesday, with markets implying an 80 percent chance of a reduction and pricing in 59 basis points of easing this year. Analysts are optimistic about deeper cuts.

Investors remain cautious about the U.S. Federal Reserve, with little expectation of a move until September, and even that is uncertain. This week's data, including key surveys on services and manufacturing and the May payrolls report, could influence the outlook.

Forex Market Movements

In forex markets, the Japanese yen remains weak among major currencies, despite significant government spending to slow its decline. Data showed Tokyo spent 9.788 trillion yen (US$62.27 billion) on currency intervention between April 26 and May 29. The dollar strengthened to 157.41 yen, just below last week's peak of 157.715.

The euro held steady at US$1.0855, benefiting from the EU inflation report but facing resistance at US$1.0895.

Commodities Update

Gold prices softened slightly to US$2,322 an ounce after four consecutive months of gains, supported partly by central bank purchases and demand from China.

Oil prices fluctuated following OPEC+'s decision on Sunday to extend most oil output cuts into 2025, with some cuts set to be reversed from October 2024 onwards. Brent crude eased by 10 cents to US$81.01 per barrel, while U.S. crude fell by six cents to US$76.93 per barrel.

With inputs from WAM