Asian stocks rally as US inflation unexpectedly falls; South Korea's Kospi surges 7%

SINGAPORE — Asia's volatile stock markets rallied on Wednesday (Jul 15) after a surprise slowdown in US inflation tempered expectations for interest rate hikes. Oil prices took a breather as the US scrapped a plan to levy shipping through the Strait of Hormuz.

Key Market Moves

• South Korea's Kospi surged 7%, ahead of the next test for the artificial intelligence rally, with earnings due at ASML — Europe's most valuable company and the world's largest supplier of equipment used to make AI chips.
• Japan's Nikkei rose 1%.
• MSCI's broadest index of Asia-Pacific shares outside Japan gained 2.4%.

AI Rally Under Scrutiny

A 25% drop in IBM's share price overnight, after the technology company's revenue forecast missed analyst expectations, highlighted how stretched and skittish the market's rally in AI-related stocks has become.

However, stellar profits at Wall Street banks helped broader gains for the S&P 500 and Nasdaq on Tuesday, which extended into Asia with US futures rising.

Currency and Bond Markets

• The US dollar was broadly lower, except against the stubbornly weak yen.
• Two-year Treasury yields fell 11 basis points to 4.19%, down from Tuesday's 17-month high of nearly 4.3%.
• The euro steadied above US$1.14.
• The Australian dollar held onto a 0.8% gain, testing US$0.70.
• China's yuan traded at a one-month high of 6.7635 to the US dollar.

US Inflation Data

The US headline consumer price index fell 0.4% in June — its first decline since the Covid-19 pandemic. Annualised core inflation came in at 2.6%, compared with expectations of 2.8%.

"For market bulls this is even better than Goldilocks could have imagined," JPMorgan analysts said in a client note. "Inflation is lower with positive earnings growth. This print should remove any fears over a July rate hike and may assuage fears on September, too. This sets up the market to move higher and to broaden as it does so."

Market pricing for the chance of a US interest rate hike in July halved to 16%.

China Growth Misses Expectations

China's annual economic growth slowed sharply to 4.3% in the second quarter, official data showed on Wednesday, missing analysts' forecasts. Weak domestic demand and the oil shock tied to war in the Middle East outweighed stronger production and exports.

Positive takeaways for investors included:

• A rebound in Chinese retail sales in June
• Relatively strong nominal gross domestic product
• Hopes that authorities will respond with targeted measures

"I don't think they will be worried enough to announce any big stimulus, but it is going to be targeted, since they are aware that growth is only for the tech areas whereas the broader economy is continuing to underperform," said UOB economist Ho Woei Chen.

Oil Markets

Brent crude futures steadied around US$85.80 a barrel, having gained nearly 13% this week on a flare-up in Middle East fighting.

US President Donald Trump reimposed a naval blockade of Iranian ports on Tuesday and threatened to attack power plants and bridges next week unless Iran resumes negotiations to end their conflict. However, he scrapped a plan for a 20% fee on shipping through the Strait of Hormuz.

Upcoming Earnings

In the US, BNY, Morgan Stanley, Johnson & Johnson, and BlackRock are set to report earnings before the morning bell, with United Airlines reporting after market close.

— REUTERS