HONG KONG: Asian markets rallied in early trading on Monday, building on the momentum of gains in the United States and Europe at the end of last week, as investors price in the expectation of further interest rate hikes aimed at taming inflation.

Equities in Japan, Australia, Singapore, Taiwan and Jakarta surged, while markets in Hong Kong, China and South Korea were closed for a public holiday.

The euro continued to gain against the dollar, with investors in Europe weighing the prospect of the European Central Bank (ECB) following the US Federal Reserve’s lead and raising key rates.

On Sunday, German central bank president Joachim Nagel signalled the ECB would probably continue raising interest rates to curb runaway inflation.

Nagel predicted inflation in Europe might peak at more than 10 percent in December.

Asian markets rally, dollar dips as traders price in policy tightening

The ECB raised the key rate by a historic 75 basis points last week, and markets expect a similar-sized hike at an October meeting.

This week, investors worldwide will be closely watching US inflation data for August, due to be released on Tuesday, with the consumer price index (CPI) expected to ease slightly to eight percent – still well above the Fed’s two-percent target.

Traders expect the Fed to impose another large hike in interest rates next week, after two 75-basis-point increases already.

“A downside surprise in US CPI is likely more of a concern and that could see the dollar weakening further,” Charu Chanana, a strategist at Saxo Capital Markets, told Bloomberg Television.

“We’ve seen some glimpses of that… towards the end of last week. That could potentially be a risk to watch particularly this week.”

‘Soft landing’ hopes

On Sunday, US Treasury Secretary Janet Yellen said she was hopeful the US economy could avoid a recession, but that the Fed would need to skilfully manage interest rates and also rely on “some good luck to achieve what we sometimes call a soft landing”.

“My hope is we will achieve a soft landing, but Americans know it’s essential to bring inflation down and, over the longer run, we can’t have a strong labour market without inflation under control,” she told CNN.

Yellen said that while the US economy’s growth rate was slowing, the labour market remained “exceptionally strong”, with almost two openings for every jobseeker.

In addition to the US CPI figures on Tuesday, traders will be closely watching UK CPI on Wednesday, and European CPI and China home sales, retail sales and industrial production data on Friday.

In Tokyo, stocks opened higher on Monday, driven by positive market sentiment off the back of last week’s gains and a weaker yen.

The dollar fetched 142.65 yen in early Asian trade, against 142.56 yen on Friday in New York.

“A cheaper yen is positive for corporate performances, despite recent media reports” that highlight the negative aspects of the weak yen, said chief strategist Masayuki Kubota of Rakuten Securities.

On Friday, Bank of Japan chief Haruhiko Kuroda met Prime Minister Fumio Kishida, saying the rapid weakening of the currency was “undesirable”, an indication of possible upcoming action to arrest the fall.

Key figures at around 0300 GMT

Tokyo - Nikkei 225: UP 1.1 percent at 28,528.90

Hong Kong - Hang Seng Index: UP 2.7 percent at 19,362.25 (closed for public holiday Monday)

Shanghai - Composite: UP 0.8 percent at 3,262.05 (closed for public holiday Monday)

New York - Dow: UP 1.2 percent at 32,151.71 (close)

New York - S&P 500: UP 1.5 percent at 4,067.36 (close)

New York - Nasdaq: UP 2.1 percent at 12,112.31 (close)

London - FTSE 100: UP 1.2 percent at 7,351.07 (close)

Frankfurt - DAX: UP 1.4 percent at 13,088.21 (close)

Paris - CAC 40: UP 1.4 percent at 6,212.33 (close)

EURO STOXX 50: UP 1.6 percent at 3,570.04 (close)

Euro/dollar: UP at $1.0085 from $1.0046

Pound/dollar: UP at $1.1609 from $1.1587

Euro/pound: UP at 86.86 pence from 86.84 pence

Dollar/yen: UP at 142.65 yen from 142.56 yen

Brent North Sea crude: DOWN 1.4 percent at $91.57 per barrel

West Texas Intermediate: DOWN 1.5 percent at $85.49 per barrel