Asian shares rise after 'relief rally' on Wall Street

Rally in equities matched by more gains in sterling as traders welcomed government's decision to scrap planned cut in top rate of income tax

Asian shares rose on Tuesday, encouraged by a rally in US shares after some weak economic data raised hopes that the Federal Reserve might ease away from aggressive interest rate hikes.

Japan's benchmark Nikkei 225 added 2.3 per cent in morning trading to 26,811.08. Australia's S and P/ASX 200 surged 2.4 per cent to 6,610.50. South Korea's Kospi jumped 2.0 per cent to 2,198.44. Markets in Hong Kong and Shanghai were closed for holidays.

“Asian equities were positive on Tuesday after a corrective session as traders eye potentially oversold market conditions,” Anderson Alves at ActivTrades said in a report.

On Monday, Wall Street soared to its best day in months in a widespread relief rally after some unexpectedly weak data on the economy raised the possibility that the Federal Reserve won't have to be so aggressive about hiking interest rates.

The S and P 500's leap of 2.6 per cent to 3,678.43 was its biggest since July, the latest swing for a scattershot market that's been mostly falling this year on worries about a possible global recession.

Wall Street's main measure of health was coming off its worst month since the coronavirus crashed markets in early 2020 and is still down nearly 23 per cent for the year.

The Dow Jones Industrial Average jumped 2.7 per cent, to 29,490.89, and the Nasdaq composite gained 2.3 per cent to 10,815.43.

Stocks took their cue from the bond market, where yields fell to ease some of the pressure that's been battering markets this year.

The yield on the 10-year Treasury, which helps set rates for mortgages and many other kinds of loans, fell to 3.62 per cent from 3.83 per cent late on Friday. It got as high as 4 per cent last week after starting the year at just 1.51 per cent.

A report on US manufacturing came in weaker than expected, along with data showing a drop off in construction spending from July to August.

That may seem discouraging for the economy, but could mean the Federal Reserve won't have to be so aggressive about raising interest rates in order to beat down the high inflation damaging households' finances.

By raising rates, the Fed is making it more expensive to buy a house, a car or most anything else purchased on credit. The hope is to slow the economy just enough to starve inflation of the purchases needed to keep prices rising so quickly.

But the Fed also risks causing a recession if it goes too far.

The Fed has already pulled its key overnight interest rate to a range of 3 per cent to 3.25 per cent, up from virtually zero as recently as March. Most traders expect it to be more than a full percentage point higher by early next year.

The yield on the two-year Treasury, which more closely tracks expectations for Fed action, fell to 4.11 per cent from 4.27 per cent following the weaker-than-expected reports on the economy.

Besides stocks, lower rates also boost prices for everything from cryptocurrencies to gold, which can suddenly look a bit more attractive when bonds are paying less in income.

Stocks of high-growth companies and particularly risky or expensive investments have been the most affected by changes in rates. Bitcoin rallied Monday with the reprieve in yields, while technology stocks did the heaviest lifting to carry the S and P 500. Apple and Microsoft both rose more than 3 per cent.

Monday's rally came despite an 8.6 per cent drop for Tesla, one of the most influential stocks on Wall Street because of its massive market value.

The maker of electric vehicles delivered fewer vehicles from July through September than investors expected.

The latest update on the US jobs market comes on Friday. Along with reports on inflation, the jobs report is one of the most highly anticipated pieces of data on Wall Street each month.

It will be the last jobs report before the Fed makes its next decision on interest rates, scheduled for November 2. Continued strength would give the central bank more leeway to keep hiking.

Traders say the likeliest move is a fourth straight increase of a whopping three-quarters of a percentage point, triple the usual move.

But stresses are building in financial markets and corporate profits have weakened as central banks around the world hike rates in concert. That means conditions have gotten “into the danger zone where bad stuff' happens,” according to Michael Wilson, equity strategist at Morgan Stanley.

That could get the Fed to blink at some point.

A suite of challenges from higher interest rates to the surging value of the US dollar may be setting things up for “the freight train of the oncoming earnings recession,” he wrote in a report.

In energy trading, benchmark US crude added 25 cents to USD 83.88 a barrel. It jumped on Monday amid speculation big oil-producing countries could soon announce cuts to production.

Shares of energy-producing companies made big gains. Exxon Mobil leaped 5.3 per cent, and Chevron climbed 5.6 per cent. Brent crude, the international standard, added 40 cents to USD 89.26 a barrel.

In currency trading, the US dollar fell to 144.78 Japanese yen from 144.81 yen. The euro cost 98.38 cents, inching down from 98.40 cents.