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Asian Stocks Surge on Potential ECB, BoC Rate Cuts

Asian stocks traded in the green on Monday as investors expect monetary policy relief from Europe and potentially Canada this week, but stubborn inflation keeps the possibility of interest rates staying higher for longer.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 2.07% after a 2.5% fall the previous week, while Japan’s Nikkei 225 index gained 1.16%% following a one-month low on Friday.

Japan saw factory activity on Monday expand in May for the first time since 2023, with the au Jibun Bank manufacturing purchasing managers’ index (PMI) growing to 50.4 from April’s 49.6.

South Korea’s KOSPI also added 1.92% after the country’s S&P manufacturing PMI picked up to its fastest in two years at 51.6 in May from 49.4 the month prior.

China’s blue-chip CSI 300 index climbed 0.24%, but later eased 0.14%, with a surge in factory activity in the world’s second-largest economy further supporting the Asian market. The Caixin/S&P Global manufacturing PMI expanded to 51.7 in May from 51.4 in April, hitting the highest since June 2022.

Possible Interest Rate Cuts by ECB, BoC in Focus

Investors now await the European Central Bank (ECB) to potentially announce its first interest rate cut at its meeting on Thursday, beating the Federal Reserve in implementing such a move.

Markets expect the ECB to trim interest rates by 0.25 percentage points to 3.75% from 4.00%, but the 2.6% year-over-year (YoY) rise in euro zone inflation in May has dented the prospect of consecutive rate cuts.

ECB officials have stated they were open to taking a different direction from their US counterpart with interest rates despite the risk of a falling euro driving inflation.

Markets are currently pricing about 57 basis points (bps) for ECB rate reductions in 2024 and are estimating a 25 bps cut this month and another by the end this year.

The Bank of Canada (BoC) is also set to make an interest rate decision on Wednesday. Bets for a June rate cut to 4.75% are at nearly 83%, while policy is forecast to ease by 59 bps, although analysts expect it to be further than that.

On the other hand, the possibility of an immediate rate cut from the Fed is weaker. Investors anticipate such a move in September, and that outlook remains mostly uncertain.

The prospect could still change this week, considering that upcoming data releases include key sectors of services and manufacturing, and US unemployment stayed at 3.9% in May due to the labor market adding 190,000 new jobs.

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