Japan Stocks Swing Before BOJ, Aussie Bonds Rally: Markets Wrap

(Bloomberg) — Japanese stocks pared declines and the yen erased gains ahead of a potentially market-moving decision from the nation’s central bank, the highlight of an event-packed day in Asia.

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The Nikkei 225 index was down 0.4% after earlier falling 1.5%. The yen traded flat while Japan’s 10-year yield advanced six basis points to 1.055%. Public broadcaster NHK reported that Bank of Japan’s board members will discuss raising interest rates to around 0.25% on Wednesday from the current range of 0 to 0.1%.

“Given the tight relationship between the yen and Nikkei, not to mention the huge influence Japan has over global financial flows, today’s meeting could be a source of meaningful volatility,” said Kyle Rodda, a senior market analyst at Capital.Com.

With the BOJ decision firmly in focus, financial markets across the region saw big moves following key earnings and local economic data that are crucial to defining monetary policy trajectories. The Australian dollar fell and short-term bonds rallied after core inflation unexpectedly decelerated last quarter, prompting traders to boost bets on an interest-rate cut by the Reserve Bank.

Markets also braced for the Federal Reserve’s decision due later Wednesday, with expectations that Chair Jerome Powell may signal a potential rate cut in September.

“The fall in AUD makes perfect sense — the market will now think the RBA can indeed converge closer to peers on the policy rate side,” said Tim Baker, strategist at Deutsche Bank.

Yields on Australia’s policy sensitive three-year government bonds declined as much as 23 basis points, the biggest intra-day fall since Dec. 14.

South Korea’s Kospi Index climbed, buoyed by gains in Samsung Electronics Co. after the chipmaker reported its fastest pace of profit growth since 2010. Shares in mainland China and Hong Kong jumped even as data showed China’s factory activity contracted for a third straight month in July.

Treasury yields stabilized after falling in the previous four sessions. A Bloomberg gauge of dollar strength edged lower.

In commodities, oil rose for the first time in four session after an industry report pointed to a fifth week of drawdowns in US crude stockpiles.

Overnight in the US, the world’s largest technology companies extended losses in late hours as Microsoft Corp.’s results fueled concern the artificial-intelligence frenzy might have gone too far. A rotation out of big tech has dragged the Nasdaq 100 down 9% from its all-time high — leaving it on the cusp of a correction.

The S&P 500 fell to around 5,435 on Tuesday. The Nasdaq 100 slid 1.4%. A gauge of the “Magnificent Seven” megacaps sank 2%. The Russell 2000 of small firms rose 0.3%. Nvidia Corp. tumbled 7%, wiping $193 billion from its market value.

If the Fed is about to begin a rate cutting cycle, stock bulls have history on their side. In the six prior hiking cycles, the S&P 500 has risen an average 5% a year after the first cut, according to calculations by the financial research firm CFRA. What’s more, the gains also broadened, with the small-cap Russell 2000 Index climbing 3.2% 12 months later, the data show.

Key events this week: