Dec 27, 2023: Asian stocks surged on Wednesday, mirroring Wall Street’s rally as investors embraced year-end optimism driven by the anticipation of the Federal Reserve potentially initiating rate cuts as soon as March.
With minimal critical economic data slated before month-end, the market sentiment is influenced by the outlook that major central banks worldwide might start easing rates in 2024, with the Fed leading the way.
This sentiment bolstered risk appetite, propelling a global equity surge. MSCI’s broadest index of Asia-Pacific shares outside Japan climbed over 1% to reach a four-month high.
The index was eyeing a 2.8% increase for the month, poised to conclude the year nearly 3% higher, rebounding from a 20% drop in 2022, which marked its worst performance since 2008.
Japan’s Nikkei closed more than 1% higher, while Hong Kong’s Hang Seng Index surged 1.5% in its first trading day post the Christmas and Boxing Day closures.
Chinese blue chips saw a marginal uptick of 0.2%.
Market projections now suggest an over 80% probability of the Fed commencing rate cuts in March, according to the CME FedWatch tool, pricing in a reduction of over 150 basis points through 2024.
Tim Murray, a capital markets strategist at T. Rowe Price, highlighted the Fed’s unexpectedly dovish signal in December, marking a crucial shift. This change, according to Murray, lessens the fear of an economic downturn in 2024 due to the impacts of tight monetary policy.
The optimism extended to Europe and Britain, with EUROSTOXX 50 futures and FTSE futures signaling gains of 0.5% and 0.4%, respectively.
S&P 500 futures and Nasdaq futures remained relatively unchanged.
In the currency market, the dollar stayed subdued, lingering near five-month lows against a basket of currencies and a four-month low against the euro, trading at around $1.1032.
The yen weakened by over 0.1% to 142.58 per dollar following the Bank of Japan’s meeting summary, revealing divisions among policymakers about the timing of transitioning away from ultra-loose monetary policy.
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, described the BOJ minutes as dovish, noting that some members downplayed inflation risks, indicating no urgency for immediate tightening measures.