Nikkei index hits record high, markets wait for Powell Congress testimony

Japan's Nikkei index reached a record high on Tuesday, gaining 2% to 41,580.17, while investors elsewhere awaited Federal Reserve Chair Jerome Powell's stance on potential rate cuts following signs of a cooling U.S. labor market.

European markets showed mixed activity, with EUROSTOXX 50 futures down 0.2% and the FTSE 100 index trading flat. Meanwhile, S&P 500 futures gained 0.2%, and Nasdaq futures rose 0.3%, after Wall Street equities edged higher to close at record peaks on Monday.

The Nikkei index surged 2.3% to a record high, bolstered by semiconductor shares, while MSCI's broadest index of Asia-Pacific shares outside Japan increased 0.4%, just below a two-year peak reached the previous day.

Taiwanese shares hit a record high before running into profit-taking, ending down 0.1%. China's blue-chip index climbed 1.1%, and Hong Kong's Hang Seng index rose 0.5%.

The Nikkei index has risen by over 24% this year. In contrast, the leading U.S. benchmarks, the S&P 500 and the Dow Jones Industrial Average (DJIA), have gained 16.84% and 4.39%.

Powell set for two days of Congressional appearances; markets bet on cut in September

Powell is set to appear before Congress on Tuesday and Wednesday. Investors, noting the recent soft labor market data, have raised the likelihood of an interest rate cut in September to about 75%, as per the CME FedWatch tool.

Shane Oliver, chief economist at financial services firm AMP in Sydney, told Reuters:

"I think markets got a degree of optimism that Powell will be cautiously dovish and that the CPI later this week will confirm that disinflation is back on track. Which I think seems reasonable to me. When you look at the U.S. economy, most of the data is softening. Jobs figures on Friday were on the soft side, unemployment trending higher. Most labour market leading indicators are cooling down.”

The key economic event this week is the U.S. consumer price report on Thursday. Headline inflation for June is expected to slow to 3.1% from 3.3% in May, with core inflation forecast to remain steady at 3.4%.

For the rest of 2024, markets have fully priced in 50 basis points of easing, equivalent to two interest rate cuts, as per Reuters.

Euro holds steady after Monday swings, markets adjust to French hung parliament

In foreign exchange markets, the euro held steady at $1.0825 after Monday's sharp swings, as investors adjusted to a hung parliament in France, which suggests potential political gridlock but eases fiscal concerns from far-right or leftist victories.  

The U.S. dollar index (DXY) steadied near four-week lows at 105.01 against a basket of currencies, offering some respite to the battered Japanese yen and Chinese yuan.

The Japanese yen held at 160.95 per dollar, after hitting a 38-year low of 161.96 per dollar last week, while the offshore Chinese yuan hovered at 7.2897 per dollar, after gaining for four straight sessions to move away from 7-and-a-half month lows.

U.S. Treasuries remained steady. The 10-year government bond yield held at 4.2841%, having declined for four consecutive sessions, while the 2-year yield was flat at 4.6285%, nearing a three-month low.

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