Shares, bonds rally as markets await signals for Fed rates

Shares and bonds surged in Asia on Thursday as investors held on to gains in the yen, awaiting fresh US data and comments from central bankers about the Federal Reserve's potential policy tightening. Japanese government bond yields dropped to historic lows, mirroring a recovery in Treasuries overnight. Oil prices fell from record highs amid uncertainty over possible military strikes between the US and Iran.

The market's primary focus was the upcoming US payrolls report on Friday, following weak private labor data for August. Fed Board Governor Christopher Waller was scheduled to speak after New York Fed President John Williams signaled cautious expectations for a rate hike this month. Gavin Friend, a senior markets strategist at NAB, noted that resolving the conflict could help bring yields down and ease tensions for central banks.

The MSCI Asia-Pacific index of shares outside Japan rose 0.5%, while US stocks ended the previous day with modest gains. The dollar index slipped 0.05% to 99.54, while the euro increased by 0.02% to $1.1589, and the yen strengthened 0.07% to 158.59 per dollar following a 0.9% gain the previous session. US Treasury yields eased from record highs overnight, with the 10-year note yield falling 0.99 basis points to 4.784%.

Japan's 30-year government bond yield decreased 10 basis points to 4.065%, after the Ministry of Finance auctioned super-long debt later in the day. Investors remained wary of Middle East developments following a large-scale exchange of attacks between the US and Iran, reigniting concerns of a wider regional conflict. US crude oil fell 0.3% to $90.74 a barrel, and Brent crude dropped 0.44% to $95.21 per barrel.

Gold rose 0.32% to $4,400.47 an ounce, and silver gained 0.51% to $65.65 an ounce. Traders had increased their odds of a Federal Reserve rate hike to roughly two out of three, up from 37% a week ago, according to CME Group's FedWatch tool. Fed Governor Williams stated that rising long-term bond yields reflected a strong economy, but he was still gathering information to inform his next monetary policy decision.

Data showed Japan's services sector expanded at its fastest pace in five months in August, suggesting the economy was robust enough to handle a potential Bank of Japan rate hike. In early European trade, the Euro Stoxx 50 futures fell 0.02%, German DAX futures dropped 0.01%, and FTSE futures declined 0.1%. US stock futures, the S&P 500 e-minis, remained flat at 7,676.3.