Asia shares at 5-month highs as rate cut bets pile up (28 Dec 2023)

Posted by Clara Mellor on 23:29 with No comments

KEY POINTS:

  1. S&P 500 futures up 0.1%, Nikkei dips as yen rises
  2. Dollar slips as Treasury yields touch 7-month lows
  3. Gold strikes a record close, oil eyes Red Sea news

Asian shares scaled five-month peaks on Thursday as market wagers on ever-more aggressive rate cuts extended a huge rally in U.S. stocks and bonds, while also leaving plenty of scope for disappointment in the new year.

The S&P 500 has climbed 14% in just two months to within a whisker of its all-time closing peak, while its price to earnings ratio is up by a quarter on the year at 24.0.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) added another 1.4%, to be up 11% in two months and at its highest since August.

Japan's Nikkei NI225 was off 0.4% as a rebound in the yen has kept its gains for December to a minimum.

Even Chinese blue chips 3399300 bounced 2.3%, having generally missed out on the global cheer as foreign investors fretted about economy's faltering recovery and tensions with the United States.

EUROSTOXX 50 futures FESX1! added 0.4% and FTSE futures Z1! 0.3%. S&P 500 futures ES1! edged up 0.1% to another record high, while Nasdaq futures NQ1! firmed 0.2%.

A lack of major news has not stopped investors from ramping up bets on rapid-fire rate cuts from the Federal Reserve.

Futures (0#FF:) now imply an 88% chance of a rate cut as early as March, a huge swing from a month ago when the probability was just 21%. (FEDWATCH)

The market has about 157 basis points of easing priced in for 2024, and sees rates reaching 3.00-3.25% over 2025.

"The rapid decline in inflation is likely to lead the Fed to cut early and fast to reset the policy rate from a level that most participants will likely soon see as far offside," wrote analysts at Goldman Sachs in a note.

"We expect three consecutive 25bp cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25-3.5% in 2025 Q3. Our forecast implies 5 cuts in 2024 and 3 more cuts in 2025."

BOND BULGE

Yields on 10-year Treasury notes US10Y stood at 3.812%, having hit a five-month low overnight. The two-year yield (US2YT=RR) was down at 4.273%, after being as high as 5.295% as recently as October.

The falls weighed broadly on the U.S. dollar and lifted the euro to its highest since July at $1.1129 EURUSD. The single currency was last at $1.1115, having gained 2% so far this month to within sight of its 2023 top of $1.1276.

Sterling GBPUSD reached a five-month top of $1.2812, after cracking resistance at $1.2794 overnight.

"Investors are placing more weight on Fed expectations driving currencies, than the signalling from other central banks like the ECB," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank.

"In part, that's because the Fed also has more impact on the overall global risk environment, which has become more risk friendly and thereby also less USD positive."

The dollar also lost ground to the yen at 141.20 yen USDJPY, having shed 4.7% for the month so far. It is still up sharply for the year as the Bank of Japan takes a glacial approach to tightening its super-easy policies.

In an interview published on Wednesday, BOJ Governor Kazuo Ueda said he was in no rush to unwind those loose policies as the risk of inflation running well above 2% and accelerating was small.

The drop in the dollar and yields provided a tailwind for gold which was up at $2,086 an ounce GOLD after scoring an all-time closing high on Wednesday.

Oil prices were subdued having slid on Wednesday as concerns over supplies eased after major shippers announced they would return to the Red Sea.

Brent BRN1! edged up 10 cents to $79.75 a barrel, while U.S. crude CL1! fell 3 cents to $74.08 per barrel.




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