Asian shares set to snap two-year losing streak on rate cut wagers

Singapore — Asian stocks took a breather on the last trading day of the year and are set to snap their two-year losing streak with investors buoyed by the expectation that the Federal Reserve will start cutting interest rates in 2024.

MSCI's broadest index of Asia-Pacific shares outside Japan was little changed on Friday but lurked near a five-month peak and was headed for a 5% gain in the year after two years of heavy losses.

The index is up more than 11% in the last two months as investors ramped up bets that central banks were done raising interest rates and would soon start easing.

Markets are pricing in an 88% chance of the Fed starting its rate cuts in March, according to CME FedWatch tool, compared to a 35% chance at the end of November. Traders are also pricing in more than 150 basis points of easing in 2024. 

Behind the ramped-up bets is a slew of US economic data that has underscored the strength in the economy as well as the likelihood of the Fed softening its stance.

The only question that the market is focused on is when and not if the central banks will cut rates, leaving ample room for disappointment in 2024.

“Goldilocks bets on soft-landing hopes, emboldened by US exceptionalism and aggressive rate cut bets inspired by emphatic disinflation, risk being wrong-footed," said Vishnu Varathan, head of economics and strategy at Mizuho Bank in a note.

Instead, he wrote, “rate cuts are likely to be measured and gradual".

In Asia, the best-performing major stock market in 2023 was Japan's Nikkei with a gain of 28%, its strongest yearly performance in a decade. Taiwan's stock market was close behind with a 26.6% rise in the year. India's Nifty is the third best gainer with a 20% rise in 2023.

Thailand's SET index on the other hand was the worst-performing stock market in Asia in 2023 with a decline of 15%. Hong Kong's Hang Seng index headed for a 14% decline, making it the second weakest performer. China's blue-chip stocks was on course for a 11% decline for the year.

Futures indicate European bourses are likely to have a subdued end to the year as traders consolidate their positions.

The pan-European Stoxx 600 has had a blistering end to the year and is up 11% in the past two months and is hovering around its 23-month peak.

Overnight, the S&P 500 ended Thursday's session just 0.3% shy of its record closing high, reached on January 3 2022.

The global bonds rally has continued, leading yields lower, after being battered for the most part of the past two years as interest rates rose. The 10-year US Treasury yield was at 3.8387%, having briefly touched 3.820%, its lowest since July 19 on Thursday.

In the currency market, the dollar was rooted on the back foot and headed for a 2% decline this year after two years of strong gains, driven by first the anticipation of and then the actual hiking of rates by the Fed to battle inflation.

Against a basket of currencies, the dollar was last at 101.50, edging away from the five-month low of 100.61 it touched on Wednesday.

While the dollar's weakness is likely to continue, especially if the Fed comes through with rate cuts early in 2024, the strength of the US economy could limit its decline.

Reuters