Asian Futures Gain as Wall Street Remains Cautious: Markets Wrap

(Bloomberg) — Asian stocks are poised to edge higher following a listless session in US stocks, as geopolitical developments along with memories of last week’s panic selling curbed the appetite for risk.

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Futures show benchmarks in Tokyo and Hong Kong will gain in early trading, while Sydney stocks look flat. With traders still reeling from last Monday’s wild gyrations, many investors are refraining from making big bets as they await more signals about the health of the world’s largest economy, including key inflation figures due Wednesday.

Oil retreated Tuesday after hitting $80, while Treasuries gained, as the US believes an Iranian attack against Israel is increasingly likely. Israel’s sovereign debt was cut by one notch by Fitch Ratings, which kept a negative outlook on the credit as continued military conflict weighs on the country’s public finances.

The S&P 500 closed steady around 5,345. Most major groups fell, though tech, energy and utilities gained. The Russell 2000 of small caps extended its August slide to 8.5%. The Cboe Volatility Index — the VIX — edged mildly higher — after an unprecedented spike last week. Contracts on US equites were little changed in Asian trading on Tuesday.

“Volatility could return this week,” said Solita Marcelli at UBS Global Wealth Management. “If inflation is too low, this may heighten concerns that the US may be heading for a recession. If inflation is too high, it could encourage fears that the Federal Reserve may be unable to cut rates quickly enough to protect the economy. Geopolitical risks also remain elevated.”

In Asia, regulators told commercial banks in China’s Jiangxi province not to settle their purchases of government bonds, taking some of the most extreme measures yet to cool a market rally that has alarmed Beijing. At least four Chinese brokerages have started fresh measures to cut back trading of domestic debt beginning last week, people familiar with the matter said.

Investors will be monitoring Japanese equities Tuesday as trading returns following a public holiday. The nation’s stocks shed $1.1 trillion in value as they kicked off August with a record three-day loss.

Elsewhere, India’s inflation eased below the central bank’s target for the first time in nearly five years, though it is unlikely to spur interest rate cuts just yet as policymakers want to see a sustained decline in prices.

US Inflation

After last week’s turmoil, markets will be focused on Wednesday’s consumer price index to see if the Fed will have a freer or more constrained hand in refocusing on the labor market and front-loading rate cuts sufficiently to secure a “soft landing,” according to Krishna Guha at Evercore.

“But do not panic if CPI is on the hotter side,” Guha noted. “This is now a labor-data first Fed, not an inflation-data first Fed, that is less data-point dependent, more forward-looking. We think if coming labor data stays soft, the Fed will still be forward-leaning on cuts.”

The risk-reward for stock markets remains mixed over the summer months against the backdrop of weakening business activity and negative earnings revisions, according to JPMorgan Chase & Co. strategists led by Mislav Matejka.

“Fed will start cutting, but this might not drive a sustained leg higher, as the cuts might be seen as reactive, and behind the curve,” they wrote.

Investors will have a brief window to buy the dip in US stocks at the end of this month as selling pressure from systematic funds eases while companies boost share buybacks, according to Scott Rubner at Goldman Sachs Group Inc.

More near-term dips can’t be excluded if activity data surprise negatively, but investors should buy stocks on weakness as fundamentals are still supportive of risk assets, HSBC strategists say.

Corporate Highlights:

Bank of Nova Scotia is making good on plans to invest more capital in the US with a $2.8 billion deal for a minority stake in KeyCorp, which was among the US regional banks hit hardest in last year’s tumult.
Johnson & Johnson has cleared a key hurdle for advancing a $6.5 billion plan to resolve thousands of lawsuits by people who say its baby powder gave them cancer, according to people familiar with the matter.
B. Riley Financial Inc. tumbled amid a new round of writedowns and a widening US investigation into whether it gave investors an accurate picture of its financial health.
JetBlue Airways Corp. has kicked off a $2.75 billion bond-and-loan sale backed by its loyalty program as the carrier seeks to raise reserves and fund general corporate purposes.
Eli Lilly & Co. sold $5 billion of bonds on Monday to help fund its $3.2 billion acquisition of gut-drug maker Morphic Holding Inc., after recession fears triggered a turbulent week.
Vestas Wind Systems A/S issued a profit warning for its full-year results in a blow to the company’s effort to turn around steep losses in recent years.

Key events this week: