Asian shares have reached five-month highs, propelled by increasing bets on aggressive rate cuts and a significant rally in U.S. stocks and bonds. The S&P 500 has surged 14% in just two months, nearing its all-time closing peak. Meanwhile, MSCI’s broadest index of Asia-Pacific shares outside Japan has gained 11% in the same period, reaching its highest level since August.
Despite concerns about potential disappointment in the new year, market participants are pricing in further rate cuts. Investors are betting on rapid-fire rate cuts from the Federal Reserve, with futures now implying an 88% chance of a rate cut as early as March—a substantial increase from just 21% a month ago.
The market is pricing in approximately 157 basis points of easing for 2024, anticipating rates to reach 3.00-3.25% over 2025. Analysts at Goldman Sachs predict 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.
Yields on 10-year Treasury notes have hit a five-month low, contributing to a weakened U.S. dollar. The euro has risen to its highest level since July at $1.1129, while sterling reached a five-month top of $1.2812. The Japanese yen also gained ground against the dollar, reaching 141.20 yen.
The prevailing market sentiment is influenced by expectations of aggressive rate cuts and their potential impact on global risk conditions. The focus on Fed expectations is outweighing signals from other central banks, such as the ECB. The dollar’s decline and falling yields have boosted gold prices, reaching $2,086 an ounce after achieving an all-time closing high on Wednesday.
Oil prices, on the other hand, remain subdued as concerns over supplies ease after major shippers announced their return to the Red Sea. Brent crude edged up to $79.75 a barrel, while U.S. crude fell to $74.08 per barrel.
The evolving market dynamics underscore the intricate interplay of central bank policies, global economic conditions, and investor expectations in shaping asset prices.