Asian equities were primed to track US stocks by notching a second day of declines as signs of economic weakness overwhelmed the market’s optimism surrounding rate cuts.

Equity futures for Japan, Australia and Hong Kong dropped. The S&P 500 fell 0.8% Thursday, extending a drop from the prior session and on track for its largest weekly fall since April. The Nasdaq 100 fell 0.5%, while the Russell 2000 benchmark of US small companies fell 1.9%, pulling back from a rally earlier in the week as investors rotated from large technology stocks.

The sudden pivot from chip companies that has swept global equity markets on signs the US would impose fresh restrictions on sales to China also began to abate. An index of such firms that includes Nvidia Corp. and Advanced Micro Devices Inc. rose 1.7%, easing its 6.8% drop the prior day. Broadcom Inc. closed higher on a report it has discussed making a chip for OpenAI.

Treasury 10-year yields rose four basis points to 4.20%. The euro dropped on bets the European Central Bank will cut rates in September. The yen was steady in early Friday trading after weakening against the dollar Thursday.

US initial jobless claims data on Thursday showed the biggest increase since early May in a sign of cooling in the labor market that supports expectations the Federal Reserve will soon cut interest rates.

The central bank is getting closer to reducing borrowing costs in September amid growing confidence that price stability is within sight. They’ve laid the groundwork for the coming move in speeches over recent weeks, and Chair Jerome Powell will likely flag it more explicitly after a policy meeting later this month.

In Asia, investors will be on the look out for fallout from China’s Third Plenum meeting. President Xi Jinping vowed to make “high-quality development” the guiding force of the world’s No. 2 economy, showing few initial signs that the top leadership is preparing to unleash major steps to boost demand or arrest the property slump.

Data set for release in the region includes June inflation for Japan, second-quarter gross domestic product for Malaysia and balance of payments for the Philippines.

In the US, the Russell 2000 rose more than 10% in just a few days, with most of the rally coming after Thursday’s cooler inflation data that bolstered bets on rate cuts. 

Small caps notched their best-ever performance over their larger peers in a five-day period, Jim Bianco, founder of his namesake research firm, said in a recent X post. He tracked the difference between the Russell 2000 and Russell 1000 since 1978.

To Dan Wantrobski at Janney Montgomery Scott, the recent “rotation” pushed the broader markets into some moderately overbought territory on a short-term basis. This alongside ongoing extended conditions in leadership areas renders them vulnerable to potential consolidation over the short run, he noted.

“As pundits start to jump on the ‘rotation is real’ bandwagon, we are cognizant of the threat of potential bull traps ahead,” Wantrobski said. “This rotation is in its very early stages, and cannot yet be confirmed as a longer-term investment theme.”

To Lori Calvasina at RBC Capital Markets, there have been indeed several false starts - even as valuations and positioning have set the stage for an eventual shift to a new leadership. The earnings season will be a “key test” for the rotation trade, she recently noted.

“The backdrop for US equities remains favorable” and “earnings growth is broadening out,” said UBS US equity strategists including David Lefkowitz and Nadia Lovell. “we are increasing our year-end S&P 500 price target to 5,900” given a “constructive” backdrop.

In commodities, oil edged lower in early Friday trading, while gold was little changed.

  - Bloomberg