Japanese stocks lift Asian shares ahead of US data deluge

Oil prices Crude oil prices eased in early trading after a 3% rise in the previous session as investors kept an eye on the escalating conflict in the Middle East that could reduce global crude supplies. Demand for safe-haven assets rose gold prices. [O/R] [GOL/]

From Japan Nikkei rose more than 2% in early trading after a holiday on Monday, a welcome relief after last week’s wild swings that began with a sell-off driven by a rising yen and fears of a U.S. recession. [.T]

MSCI IndexThe broadest index of Asia-Pacific shares outside Japan rose slightly to 556.19. Chinese stocks were little changed in early trading, while Hong Kong’s Hang Seng index was also flat.

“While aftershocks can reveal vulnerabilities, we continue to view recent volatility as equivalent to a ‘heart palpitation,’ not a ‘cardiac arrest,’” Viktor Shvets, head of global strategy at Macquarie Capital, said in a note. “We also maintain that nervousness about a slowdown in the U.S. is overblown.” Investor sentiment remained fragile, however, with the yen trading at 147.16 per dollar on Monday, having touched a seven-month high of 141.675 last week, a far cry from the 38-year low of 161.96 it hit in early July. A surprise rise in the yen Bank of Japan Last month, following bouts of intervention by Tokyo in early July, investors were disoriented and forced to abandon popular carry trades, in which traders borrow yen at low rates to invest in dollar-denominated assets for higher returns.

Data on Friday showed leveraged funds (typically hedge funds and various types of money managers) closed their yen positions at the fastest pace since March 2011.

Given the yen’s recent recovery, the dollar-yen is now more in line with its yield spread, according to Karsten Junius, chief economist at J. Safra Sarasin Bank.

“Another wave of unwinding of yen-funded carry trades is likely to boost the yen further towards the end of the year. However, we do not expect USD/JPY to fall significantly below 140.”

WEEK WITH DATA SOURCES

This week, investors’ attention will focus on a raft of US economic data that will help sharpen the view on the Federal Reserve’s next moves, with markets now evenly split between a 25 basis point or 50 basis point cut at the next meeting in September.

Traders are pricing in 100 basis point cuts this year.

Surprisingly weak payrolls data fueled fears of a US recession that triggered the market crash early last week, but strong US data helped allay fears of a global slowdown towards the end of the week and stocks rallied.

Markets could move later in the day when US producer price data for July is released as the figures feed into the Fed-favored measure of core personal consumption (PCE).

Any hint from the PPI of soft inflation pressures could prompt financial markets to double down on bets that the Fed will cut rates sharply this year, which would weigh on the dollar, said Kristina Clifton, senior economist at Commonwealth Bank of Australia.

On Wednesday, US consumer price index data for July are due to be released, which is expected to show that month-on-month inflation rose to 0.2%. Retail sales data is due on Thursday.

The dollar index, which measures the greenback against six major currencies, rose 0.1 percent to 103.18. The euro was flat at $1.092975, while sterling was little changed at $1.27665.

In the commodities market, Brent crude futures fell 0.56% to $81.84 a barrel, while U.S. West Texas Intermediate crude futures fell to $79.61 a barrel, down 0.55% in early trading. Brent had gained more than 3% on Monday, while U.S. crude futures had risen more than 4%.