Asian stocks experienced a broad surge on Wednesday, mirroring the positive momentum on Wall Street, fueled by year-end optimism and expectations that the Federal Reserve might initiate rate cuts as early as March next year. As the year draws to a close with minimal critical economic data releases, market sentiment remains influenced by the anticipation that major central banks, including the Fed, could adopt a more accommodative stance in 2024.
The rally in global equities was evident in the performance of MSCI’s broadest index of Asia-Pacific shares outside Japan, which was up 0.6%. The index was poised for a 2.3% gain for the month, contributing to a year-end increase of approximately 2.5%, following a challenging 2022 when it witnessed a 20% decline, marking its worst performance since 2008.
Japan’s Nikkei surged by 1.2%, and Hong Kong’s Hang Seng Index advanced by 0.9% on its first trading day after the Christmas and Boxing Day holidays. Market expectations, as reflected in the CME FedWatch tool, now indicate an over 80% probability of the Fed commencing rate cuts in March, with more than 150 basis points of easing priced in for the entirety of 2024.
The recent dovish signal from the Federal Open Market Committee (FOMC) in its December meeting was a notable development, according to Tim Murray, a capital markets strategist at T. Rowe Price. He highlighted the positive impact of a more accommodative Fed in mitigating concerns about tight monetary policy dragging the economy into recession, reducing the likelihood of a recession in 2024.
In the currency market, the dollar remained weak, hovering near a five-month low against a basket of currencies and a four-month trough against the euro, which last traded at $1.1032. The yen declined by 0.2% to 142.68 per dollar, influenced by varying opinions among Bank of Japan (BOJ) policymakers on the potential shift away from the ultra-loose monetary stance, and the BOJ minutes revealed a divergence of views among board members regarding the timing of a move away from current policy measures.
While Asian stocks celebrated the year-end rally, Brent and U.S. WTI crude futures experienced slight declines from their recent one-month highs. Concerns about shipping disruptions arose following further attacks on ships in the Red Sea, contributing to the complex landscape as 2023 concludes.
