Shares, bonds rally as markets await signals for Fed rates

Shares and bonds experienced a relief rally in Asia on Thursday, as the yen maintained its gains. Investors were waiting for fresh U.S. data and central banker comments to gauge whether the Federal Reserve would tighten policy this month. Japanese government bond yields declined to historic lows, mirroring a recovery in Treasuries overnight, ahead of a Tokyo auction of super-long debt.

Oil prices slipped from elevated levels amid uncertainty over potential renewed military strikes between the U.S. and Iran. The market's primary focus was on Friday's crucial U.S. payrolls report, which followed disappointing private labor data for August. Federal Reserve Board Governor Christopher Waller was set to speak after Federal Reserve Bank of New York President John Williams signaled a possible rate hike on hold.

Waller noted that a resolution to the conflict could bring yields down across the board, easing tensions and allowing central banks to consider normal policy measures. The MSCI's Asia-Pacific shares index outside Japan rose 0.5%, following a mild gain in U.S. stocks the previous day. The dollar index fell 0.05% to 99.54, while the euro increased by 0.02% to $1.1589, and the yen strengthened by 0.07% to 158.59 per dollar after a 0.9% surge the day before.

U.S. Treasury yields softened from multi-year highs overnight, reflecting concerns about tighter monetary policy and deteriorating fiscal conditions. The 10-year note yield dropped 0.99 basis points to 4.784%, and the 30-year JGB fell 10 basis points to 4.065%, after Japan's Ministry of Finance auctions the securities later in the day.

Investors remained cautious due to ongoing Middle East developments following the U.S. and Iran's largest barrage of attacks since July, reigniting fears of a broader regional escalation. U.S. crude oil declined 0.3% to $90.74 a barrel, and Brent fell 0.44% to $95.21 per barrel. Gold saw a 0.32% gain to $4,400.47 an ounce, while silver rose 0.51% to $65.65 an ounce.

Traders had recently boosted bets on a Federal Reserve interest rate hike, now assigning a roughly two-in-three chance of a 25-basis-point increase this month, up from 37% a week ago, according to CME Group's FedWatch tool. Fed Governor Williams mentioned on Wednesday that rising long-term bond yields were an indicator of a strong economy, stating that he was still gathering information to inform his next monetary policy decision.

The upcoming nonfarm payrolls report on Friday, following a lower-than-expected ADP National Employment Report, would be closely watched as markets assessed how far central banks were willing to tighten policy in response to persistent inflation pressures. In early European trading, the Euro Stoxx 50 futures declined 0.02%, German DAX futures fell 0.01%, and FTSE futures lost 0.1%. U.S. stock futures, the S&P 500 e-minis, remained flat at 7,676.3.