Asian equities experienced a mixed performance on Tuesday as investors digested Wall Street’s overnight rally and growing expectations of a Federal Reserve rate cut. 

While Japan’s Nikkei 225 retreated from its all-time highs, other major regional benchmarks, including South Korea’s KOSPI and Hong Kong’s Hang Seng, advanced modestly, reflecting investor caution amid geopolitical uncertainties and significant economic data releases. This article from Nabotex Group’s Ben Stevens offers a deep dive into the subject.

Wall Street Rally and Fed Rate Cut Expectations Drive Asian Markets

Asian markets opened higher following strong performance on Wall Street, which was fueled by last week’s weaker-than-expected US jobs report. This report increased market speculation about a September interest rate cut by the US Federal Reserve (Fed). 

Traders now consider the possibility of a larger 50-basis-point reduction, in addition to a nearly certain 25-basis-point cut, which has bolstered investor sentiment in the Asia-Pacific region.

Despite global political turbulence and concerns about slower growth in China, Asian equities held positive momentum in the early session. Investors remain cautious, however, as volatility in currency and bond markets continues to influence regional trading activity.

Mixed Performance Across Major Asian Benchmarks

At the time of writing:

• Japan’s Nikkei 225 trades near 43,700, slightly down from record highs reached earlier this week.
• Hong Kong’s Hang Seng Index remains above 25,800, although daily gains have been trimmed after touching its highest level since October 2021.
• South Korea’s KOSPI advanced 1.07%, closing above 3,250, marking the highest level in more than five weeks.
• China’s Shanghai Composite declined 0.30% to 3,800, while the Shenzhen Component fell 0.89% to 12,500.

This divergence highlights the uneven risk sentiment across the Asia-Pacific region, influenced by monetary policy expectations, corporate earnings data, and domestic policy measures.

Fed Rate Cut Probability and Market Expectations

Investor focus remains on US monetary policy, particularly the likelihood of a September rate cut. According to the CME FedWatch Tool, the probability of a 25-basis-point cut has risen to nearly 90%, up from 86% last week. 

Meanwhile, a 50-basis-point reduction is priced at 10%, indicating that markets are considering a more aggressive easing scenario if economic indicators weaken further.

Key economic releases that will influence market direction include:

• US Nonfarm Payrolls Benchmark Revision, expected later in the day.
• US Producer Price Index (PPI), scheduled for Wednesday.
• US Consumer Price Index (CPI), due on Thursday.

These data points are critical for understanding inflationary pressures and the Fed’s future policy trajectory, which will directly impact global equities, currencies, and fixed-income markets.

Hong Kong Stocks Gain on Policy Easing and Mainland Market Strength

Hong Kong equities advanced, led by a roughly 2% jump in property shares following Shenzhen’s easing of home-buying restrictions last week. Technology, financial, and consumer stocks also gained, supported by a third consecutive day of gains in mainland Chinese markets. 

Analysts attribute the rally to Beijing’s progress toward a record trade surplus, signaling potential economic growth and improved corporate earnings prospects.

The rise in property and tech shares suggests that investors are increasingly optimistic about domestic stimulus measures and the recovery of key sectors. However, analysts warn that external uncertainties, including US-China trade tensions, could limit further upside in Hong Kong equities.

South Korea: Tax Policy Signals Support KOSPI

In South Korea, the KOSPI found support after Finance Minister Koo Yun-cheol indicated the government might reconsider its capital gains tax proposal for large shareholders. The initial plan would have reduced the taxable equity holding threshold from KRW 5 billion ($3.61 million) to KRW 1 billion, raising concerns about market liquidity and investor participation.

The signaling of a potential reversal eased investor fears, encouraging equity purchases and supporting the KOSPI’s weekly gains. Market participants are now monitoring further announcements regarding taxation and regulatory measures, which could influence South Korean equity performance over the medium term.

Outlook: Fed Policy and Regional Equity Trends

Overall, Asian equities are showing a mixed performance, with the Nikkei 225 pulling back from record highs, while Hong Kong and South Korea post modest gains. The market focus remains on:

• US monetary policy, particularly the potential for a 50-basis-point Fed rate cut.
• Upcoming inflation reports, including the PPI and CPI, will influence interest rate expectations.
• Domestic policy developments in Japan, South Korea, and China are shaping investor sentiment and market positioning.

The interplay between global economic signals, regional political developments, and central bank actions will continue to determine the short- to medium-term trajectory of Asia-Pacific equity markets. Investors are advised to monitor both macro data releases and policy announcements closely, as these will remain the primary drivers of volatility and market direction.