Asian markets gain, investors anxious for U.S. rate hike clues

© Reuters. Pedestrians wait to cross a road at a junction near a giant display of stock indexes in Shanghai, China August 3, 2022. REUTERS/Aly Song

By Scott Murdoch

HONG KONG (Reuters) - Asian share markets were broadly positive while the dollar was slightly weaker on Thursday, with investors nervously awaiting the U.S. Federal Reserve's annual Jackson Hole conference for clues on how sharp future interest rate hikes might be.

In early European trading, the pan-region Euro Stoxx 50 futures were up 0.25%, German DAX futures were up 0.34%, and FTSE futures were up 0.29% at 7,494.5.

U.S. stock futures, the S&P 500 e-minis, were up 0.42%.

The Federal Reserve's annual monetary policy conference in Jackson Hole, Wyoming is due to start on Friday.

Investors have pared back expectations that the Fed could tilt to a slower pace of rate hikes as U.S. inflation remains at 8.5% on an annual basis, well above the Fed's 2% target. But Chair Jerome Powell's speech will be scrutinized for any indication that an economic slowdown might alter the Fed’s strategy.

Investors now expect the Fed Funds rate to peak at 3.80% in March 2023, up from 3.62% a fortnight ago, said Tapas Strickland, NAB's economics director.

"Market moves at least are consistent with the hawkish pushback seen by Fed officials over recent weeks," he added.

Interest rate futures imply a 60% chance of a 75 basis point Fed hike in September, up from 50% earlier this week.

Still, MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.7%, after U.S. stocks ended the previous session with mild gains.

Australian shares climbed 0.7%, while Japan's Nikkei stock index was up by 0.72%.

China's CSI300 rose 0.1% while Hong Kong's Hang Seng Index opened up 1.7% in a shortened trading session due to a typhoon.

"Equities markets at the moment see bad news about the economy as being essentially good news because to them it means that the Fed might not tighten as much as thought," said Rob Subbaraman, Nomura's head of global macro research.

"But equities markets could have to reassess that after Jackson Hole."

In Asian trade, the yield on benchmark 10-year Treasury notes hit 3.1021% compared with its U.S. close of 3.106% on Wednesday.

The two-year yield, which rises with traders' expectations of higher Fed fund rates, touched 3.386% compared with a U.S. close of 3.386%.

The yields had also made gains overnight, though that did not stop U.S equity markets rising on Wednesday.

The dollar dropped 0.36% lower against the yen to 136.62 . It is still some distance from its high this year of 139.39 in mid-July.

The European single currency was up 0.4% in the early afternoon Asian trade at $1.0001 after having been flat at the start of the session.

The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, was slightly weaker in Asia at 108.62.

"Expectations of a hawkish message from FOMC Chair Powell at Jackson Hole will likely keep upward pressure on the US dollar in the run‑up to his speech on Friday," Commonwealth Bank analysts wrote in a client note.

"However there is a risk that the speech is deemed not hawkish enough and that we see some retracement in the US dollar."

U.S. crude oil futures ticked up 0.5% to $95.37 a barrel. Brent crude climbed to $101.83 per barrel.

Gold was slightly higher, with spot gold trading at $1,756.78 per ounce. [GOL/]

"Gold edged higher as the market weighs the outlook for monetary policy... Weakening economic activity induced some haven buying in the precious metals, snapping six days of declines," ANZ analysts wrote in a note to clients.