In Asia, expectations that Sanae Takaichi will become Japan’s next prime minister lifted confidence in the region, briefly propelling the Nikkei to an all-time high near 50,000 points and weakening the yen, as investors anticipated a more pro-stimulus policy stance.
Meanwhile, in the U.S., President Donald Trump struck a conciliatory tone ahead of his planned meeting with Chinese President Xi Jinping in South Korea next week, saying he expected a “fair trade deal” and downplaying potential friction over Taiwan. The prospect of a diplomatic thaw added to the positive momentum, further buoyed by news of a rare earth supply deal between the U.S. and Australia, which investors viewed as a strategic step to reduce trade dependence on China.
Investors regain confidence
Last week’s market jitters, triggered by a wave of bad loans at U.S. regional banks and prolonged government shutdown uncertainty, appear to have faded, leading investors to “buy the dip” ahead of key corporate earnings reports.
“The market has hurdled the wall of worry with ease, with new capital injected into risk and fresh oxygen into the market’s lungs,” said Chris Weston, Head of Research at Pepperstone.
Even so, some caution remains. European Central Bank (ECB) Chief Economist Philip Lane warned that euro zone banks could face pressure if dollar funding tightens. He noted that April’s market turmoil — when both the dollar and U.S. Treasuries sold off — exposed vulnerabilities in European lenders’ dollar-denominated liquidity positions.
Chris Scicluna, economist at Daiwa Capital Markets, said Lane’s comments reflect a broader unease over “pockets of risk” emerging in U.S. financial markets, particularly in private credit and AI-related assets. “If there’s a sudden pullback in the U.S. financial sector, it will have a significant impact on European banks and others,” he cautioned.
The ECB, which meets next week, is not expected to cut rates soon, though the tone among policymakers has turned more cautious. In contrast, market-based forecasts suggest the U.S. Federal Reserve could deliver up to three rate cuts within the next six months.
Rate-cut optimism fuels rally
Hints of easier U.S. monetary policy and comments from White House economic adviser Kevin Hassett, who said the government shutdown may end this week, gave equities a further boost.
A broad rally overnight sent all three major U.S. indexes sharply higher, with chip stocks touching record levels. In Europe, the STOXX 600 inched up 0.1%, trading just below all-time highs, while U.S. stock futures slipped slightly by the same margin in early Tuesday trading.
Analysts now project S&P 500 companies to post 9.3% year-on-year earnings growth in the third quarter — an improvement from early-October expectations of 8.8%.
Markets watch Japan and gold
In currency markets, the U.S. dollar gained 0.7% against the yen, trading at ¥151.83, as investors priced in the likelihood that a Takaichi-led government would maintain a dovish stance on monetary policy. Traders see only a 20% chance of a Bank of Japan rate hike next week, though Governor Kazuo Ueda has remained noncommittal on the timing.
As investors rotated back into equities, gold slipped from recent record highs, reflecting a renewed appetite for risk assets.
Overall, Tuesday’s trading reflected a cautious but noticeable return of confidence — powered by easing geopolitical tensions, stabilising banking concerns, and growing anticipation of monetary easing in the world’s largest economy.