1/5/2024

Asian and American markets react to the Fed

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Key points:

  • Asian stocks faltered on Friday as global stocks snapped a nine-week winning streak.
  • The US dollar is poised for its strongest weekly gain since mid-May as hopes of an aggressive Fed rate cut fell short.
  • The latest catalyst for scaling back the Fed’s rate cut plans was firmer US labor market data on Thursday.

Asian stocks fluctuated on Friday, ending a nine-week winning streak for global stocks, as bets on aggressive Federal Reserve interest rate cuts faded. We remind you that the day before this, the Asian market showed a decline.

The dollar gained ground against the yen, rising above 145 yen on Friday, boosted by higher long-term Treasury yields.

The broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.49%, with Hong Kong’s Hang Seng (.HSI) losing 0.8% and mainland China’s blue-chip index (.CSI300) retreating 0.62%.

However, Japan’s Nikkei index (.N225) bucked the trend, rising 0.27% as exporters benefited from a weaker yen. The dollar traded higher at 145.25 yen, touching 145.365 for the first time since December 13.

The deadly New Year’s earthquake off the coast of Japan’s Sea of Japan has forced the Bank of Japan to abandon its latest expectations for policy changes made at a meeting this month.

“The BOJ’s continued reluctance to provide a timetable for economic normalization contradicts the Fed’s opposition to the aggressive path of rate cuts that the market assumed a week ago,”

said James Knightton, senior corporate FX dealer at Convera.

 

The state of Asian markets is a consequence of American policy

The MSCI World Index (.MIWO0000PUS) is on track to post a 1.78% decline this week, as investors weigh the latest economic data and commentary from central bankers.

“The weak opening of stock markets in 2024 suggests that investors are still recovering from December’s exuberance, waking up to the reality that the bullish rally may have been too much, too soon.”

said Lewis Grant, senior portfolio manager for global equities at Federated Hermes Limited.

“Uncertainty remains and much will depend on the first few economic indicators of 2024.”

On Thursday, firmer-than-expected US labor market data provided some relief to investors who had been concerned about the potential for a recession. The data showed that the US economy added 467,000 jobs in January, more than economists had expected.

Fed officials have also been more measured in their recent comments about the economy, suggesting that they are less convinced that a rate cut is necessary. Richmond Fed President Thomas Barkin, for example, said this week that the central bank is “making real progress” in curbing inflation.

Traders are now pricing in a slightly lower probability of a Fed rate cut by March, according to the FedWatch tool. The tool now shows a 66% chance of a rate cut, down from 71% a week ago.

After a turbulent trading week, the S&P 500 has suffered its first weekly loss since late October, dropping 0.34% on Friday. Futures are pointing to a further decline of 0.11% when markets open.

The US dollar index, which measures the currency against a basket of six major currencies, gained 0.18% to 102.61, pulling back from its three-week high of 102.73 set on Wednesday. It has gained 1.22% over the week.

The 10-year Treasury yield rose to 4.023% and was last at 4.0135%, up about 15.5 basis points for the week.

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