Japan Leads Asian Equities Rally on Abe Stimulus

Japanese shares drove gains in Asia, set for their steepest two-day climb since February, and the yen weakened after Prime Minister Shinzo Abe said he’ll order a fresh round of fiscal stimulus. The pound strengthened as the U.K. moved closer to getting a new leader.

The MSCI Asia Pacific Index climbed after the S&P 500 Index closed above a record high that had stood for more than a year. The yen extended its biggest loss since October 2014 after an election victory for Abe’s coalition emboldened the premier to step up economic support, while the pound rose for a third day as British Home Secretary Theresa May prepared to take over as prime minister. U.S. crude traded near a two-month low and nickel gained.

Global equities are almost back to where they were when the U.K. voted to leave the European Union, having rebounded on prospects for stimulus in some of the world’s leading economies. Abe said he would order ministers on Tuesday to begin compiling a stimulus package that one of his advisers has recommended should be 20 trillion yen ($199 billion) in the current fiscal year. The Bank of England is forecast to cut interest rates on Thursday and traders are betting there will be further monetary easing in the euro area this year.

”It looks like the U.K. political process is moving much more swiftly than had been anticipated and that’s helped," said Mitul Kotecha, head of Asia currency and rates strategy at Barclays Plc in Singapore. “On top of that in Japan, Abe getting a super majority is fueling expectations of economic stimulus.”

Finance ministers from EU member countries will meet for talks in Brussels on Tuesday and an international Court is due to deliver its ruling on a challenge brought by the Philippines to China’s claim to more than 80 percent of the South China Sea. In addition, a two-day summit between the EU and China, focusing on political and economic relations, begins in Beijing.

Stocks

The MSCI Asia Pacific Index gained 1.2 percent as of 7:11 a.m. London time, after rallying 1.9 percent on Monday. The Topix climbed 2.4 percent, almost wiping out the losses recorded since Britain’s so-called Brexit vote was held on June 23. Taiwan’s benchmark was set for its highest close since November.

Automakers led gains among Japanese exporters, with Toyota Motor Corp. rising 2.7 percent and Mazda Motor Corp. surging 6.5 percent. Nintendo Co. jumped for a fourth day, taking its advance since July 6 to more than 50 percent, after its Pokemon Go mobile game became an instant hit. South32 Ltd., which owns the world’s largest silver and lead mine, surged to a one-year high in Sydney after Credit Suisse Group AG said it expects the company to return cash to shareholders.

Futures on the Euro Stoxx 50 Index declined 0.1 percent, as did those on the U.K.’s FTSE 100 Index. S&P 500 contracts added 0.1 percent following the gauge’s 0.3 percent advance to an all-time high in the last session. Alcoa Inc. unofficially kicked off the U.S. earnings season after markets closed Monday, reporting profit for the second quarter that topped analysts’ estimates.

Currencies

Japan’s currency fell 0.5 percent to 103.27 per dollar, after sliding 2.3 percent in the last session.

Sunday’s election, which saw Abe’s ruling group score a convincing victory in the upper house, “opens up the scope for sweeping reforms,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank. "The Bank of Japan is likely to add to the macroeconomic stimulus package by easing monetary policy along with a more supportive fiscal environment.”

The pound rose as much as 0.7 percent to a one-week high after U.K. Prime Minister David Cameron said his replacement would be installed by Wednesday night, lifting the uncertainty over the nation’s leadership following the EU vote. Theresa May is the sole candidate to replace him after Conservative Party leadership hopeful Andrea Leadsom announced her withdrawal from the contest on Monday.

The Australian dollar rallied 0.8 percent, the best performance among 31 major currencies, as a report showed business confidence picked up last month and investors favored higher-yielding currencies. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, fell 0.2 percent after rising 0.5 percent on Monday.

While Friday’s better-than-estimated U.S. payrolls data spurred an increase in bets on the Federal Reserve raising rates this year, the odds of a hike by December are just 29 percent, from 50 percent a month ago, according to futures trading tracked by Bloomberg.

Commodities

West Texas Intermediate crude traded at $44.83 a barrel, near to a Monday close of $44.76 that was the lowest since May 10. Iran plans to double oil exports as long as the increase is absorbed by global markets, while Libya’s state crude producer is seeking to reopen oil ports and restore output.

Nickel gained 1.2 percent to $10,165 a metric ton in London amid speculation there will be supply cuts in the Philippines, the biggest ore producer. The nation’s government has put mines on notice that operations falling short of environmental and welfare standards will be shut down and Goldman Sachs Group Inc. sees the price climbing to $12,000 over the next six months assuming a quarter of the nation’s output is taken out of the market.

Palm oil fell 0.3 percent in Kuala Lumpur, where it is on the cusp of entering a bear market. Inventories in Malaysia are set to increase for the first time since November, according to a Bloomberg survey, while a growers’ group estimates June production to have climbed 10 percent from a month earlier.

Bonds

The yield on U.S. Treasuries due in a decade increased by two basis points to 1.45 percent, after climbing seven basis points on Monday as an auction of three-year notes attracted the weakest demand since 2009. The rate on 10-year Australian bonds rose four basis points to 1.95 percent.

Kathleen Gaffney, whose Eaton Vance Bond Fund is beating all of its peers this year after rebounding from a loss, warned Treasuries may snap back from a record-setting rally that drove 10- and 30-year yields to all time-lows in the past week. Demand for the securities strengthened as investors sought alternatives to the negative yields offered by debt in Germany and Japan.

“An unwind in the Treasury market” is going to happen at some point, Gaffney, who is based in Boston, said Monday on Bloomberg Television. “With everyone jumping on board with the yield grab, it’s going to be really tough to get out at just the right time.”

Source: Bloomberg