Asia markets rally on US Fed remarks signalling rate cuts in 2024

ASIA markets lifted off after the US Federal Reserve paused interest rate hikes and signalled that it will cut interest rates in 2024.

While the pause was in line with expectations, market watchers noted that the Fed statements and economic projections were more dovish than markets expected.

At the final Federal Open Market Committee meeting of the year, held from Dec 12 to 13, Fed chair Jerome Powell acknowledged that there were discussions over the timing of rate cuts.

Projections now point to 75 basis points worth of rate cuts in 2024, versus the 50-basis-point cut at the September meeting.

IG market analyst Yeap Jun Rong noted that this is still less aggressive than the 100 to 125 basis-point cuts priced by the markets before the meeting.

Nevertheless, market participants likely viewed the shift in stance as sufficiently dovish. The lack of a pushback on rate cuts may have also caught some by surprise, given the hawkish tone coming from policymakers just last month, he said.

“Overall, the soft-landing narrative is still broadly intact, and along with rate-cuts validation from the Fed, there seems to be little in the way to stop the risk rally,” Yeap said.

Most key indices in Asia joined a global rally in stocks on Thursday (Dec 14).

At the close, the Straits Times Index rose 0.6 per cent, the FTSE Bursa Malaysia KLCI gained 0.6 per cent and the Kospi Composite Index added 1.3 per cent.

The Hang Seng Index also advanced 1.1 per cent, while the Jakarta Composite Index climbed 1.4 per cent.

However, the Nikkei 225 slipped 0.7 per cent.

Bonds rallied after the meeting, causing US two-year Treasury yields to fall by 30 basis points, and 10-year yields to decline 18 basis points.

But Eugene Leow, senior rates strategist at DBS, said the market reaction to the Fed pivot was outsized, having jumped ahead and front-loaded rate cuts into early 2024.

Leow sees several plausible paths to lower rates, and does not necessarily agree with the current aggressive pricing.

“Generally, a Fed that cuts earlier may well lead to less easing overall, as the economy gets supported and hard landing risks get diminished,” he said.

Looking forward, the dovish signal left by the Fed this round likely provides room and time for risk assets to perform, with the next Fed meeting only due in February 2024, said Ray Sharma-Ong, investment director of multi-asset solutions at abrdn.

This should encourage more cash deployment into bonds and equities, he added.

Asia equity markets stand to benefit, as US growth moderates while Asia growth remains resilient, Sharma-Ong said.

For Chetan Seth, Asia-Pacific equities strategist at Nomura, some larger markets such as Korea and India should be the key beneficiaries, as global fund flows are likely to follow these larger markets.

An additional kicker for them is a likely stronger local foreign exchange, Seth said.

Furthermore, US Treasury yields will have the scope to fall further from current levels, which should benefit long-duration equities and regions with high exposure to tech stocks, Sharma-Ong noted.

These include markets such as South Korea and Taiwan, and sectors such as Asia real estate investment trusts, he said.

Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, also expects stocks and bonds to have the potential to generate positive returns in 2024, even as global growth is decelerating.

“Investors may feel they have missed the opportunity to lock in high rates given the sharp drop in the US Treasury yields in the last two months, but we still see opportunities in fixed income beyond government bonds,” Tai said.

Given that the Fed is willing to be more flexible in monetary policy, the probability of avoiding a sharp downturn has increased.

This should benefit corporate bonds – both investment grade and high yield – and a broader range of US and Asian equities, Tai said.

The potential drop in cash rates in Asia next year could also turn investors’ attention towards high-dividend equities, he added.

Meanwhile, the elevated expectations of US rate cuts will likely support more Asia foreign exchange gains, said Jeff Ng, head of Asia macro strategy at Sumitomo Mitsui Banking Corporation.

Ng expects heightened volatility for US dollar-Asia currencies rates in the first quarter of 2024, until there is more certainty on the US monetary policy path.