Asian Stocks Retreat as Fed Sees Fewer Rate Cuts: Markets Wrap

(Bloomberg) — Asian stocks slid on Thursday, echoing a slump in US equities, after the Federal Reserve trimmed expectations for rate cuts next year.

Equity benchmarks in Japan, Australia, South Korea and China declined, helping drag a gauge of regional equities more than 1% lower. US stock futures edged higher after the S&P 500 suffered its biggest loss since 2001 for a Fed decision day.

The yen traded near 155 per dollar following Wednesday’s slump as traders awaited a Bank of Japan decision where policymakers are expected to keep rates on hold. The prospect of fewer US rate cuts buoyed the dollar and sent Asian currencies tumbling, with the South Korean won dropping to its weakest level in more than 15 years.

“Asian currency and equity markets should inevitably be negatively affected today and possibly over the next few days,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “Due to the negative market reaction to the FOMC, it will be even more difficult for the BOJ to raise policy rate today.”

The moves come after the Fed lowered rates by 25 basis points on Wednesday as expected, with the median policymaker now seeing just a half-percentage point of reductions next year, half of what was expected in September. The BOJ’s rate decision is the next event risk for traders, with any surprise in the policy outcome likely to whip up more volatility in global markets.

Treasury yields were little changed after rising across the curve in the prior session. Australian yields jumped Thursday, while those for New Zealand edged higher after the country’s economy fell into recession.

The last time the S&P 500 saw losses of the magnitude on Fed’s decision day was on Sept. 17, 2001, when the index fell nearly 5%. It dropped 12% on March 16, 2020, a day after the Fed’s emergency weekend meeting during the pandemic.

Fed Chair Jerome Powell said the central bank would be more cautious as it considers further adjustments to the policy rate, noting the Fed is committed to reaching its 2% inflation target. “We need to see progress on inflation,” he said. “We moved quickly to get to here but moving forward we are moving slower.”

Fed Outlook

Whitney Watson of Goldman Sachs Asset Management expects the Fed to skip a rate cut in January before resuming on its easing path in March.

“While the Fed opted to round out the year with a third consecutive cut, its New Year’s resolution appears to be for a more gradual pace of easing,” said Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at the firm.

Back in Asia, the the BOJ is set to discuss whether or not an interest rate hike is warranted on Thursday, with views from officials suggesting a lean toward a hold amid growing market speculation of a January move. The central bank is expected to leave its benchmark rate unchanged at 0.25%, according to traders’ views reflected in the latest overnight-indexed-swap rates.

“If the BOJ does skip the opportunity to raise rates this month, and with the January BOJ meeting clouded under the US Presidential inauguration, it means the BOJ is unlikely to raise rates until their meeting in March,” said Tony Sycamore, an analyst at IG Markets in Sydney. “This would be a dire outcome for the JPY, with the potential to send it cascading back to 160 per dollar.”

Over in China, authorities ramped up support for the currency via its daily reference rate after the Fed’s caution over future rate cuts sent the offshore yuan to a fresh one-year low.

Elsewhere, the prospect of a US government shutdown re-emerged. President-elect Donald Trump told Fox News he was “totally against” a proposed government funding bill, threatening a stopgap measure that would keep the government open until mid-March. House Majority Leader Steve Scalise said the stopgap funding measure released Tuesday was dead.

The Fed’s Wednesday cut precedes a busy run of central bank announcements from around the world. Rate decisions are expected Thursday in the Philippines, Taiwan, the UK, Norway, Sweden and Mexico. China’s one-year Medium-Term Lending Facility rate may be announced at any time through Dec. 24.

In commodities, oil fell as expectations for fewer Fed rate cuts boosted the dollar. Gold rose after a sharp decline Wednesday and Bitcoin traded at around $100,000.

Key events this week: 

• Japan rate decision, Thursday
• UK BOE rate decision
• US revised GDP, Thursday
• Japan CPI, Friday
• China loan prime rates, Friday
• Eurozone consumer confidence, Friday
• US personal income, spending & PCE inflation, Friday

Some of the main moves in markets:

Stocks

• Australia’s S&P/ASX 200 fell 1.8% as of 8:19 a.m. Tokyo time
• Nikkei 225 futures fell 1.9%
• Hang Seng futures were little changed
• S&P 500 futures rose 0.2%, after dropping 2.9% Wednesday

Currencies

• The Bloomberg Dollar Spot Index rose 0.9%
• The euro was little changed at $1.0360
• The Japanese yen rose 0.1% to 154.58 per dollar
• The offshore yuan was little changed at 7.3242 per dollar

Cryptocurrencies

• Bitcoin fell 0.6% to $100,383.89
• Ether fell 1.5% to $3,634.4

Bonds

• The yield on 10-year Treasuries advanced 12 basis points to 4.51%
• Australia’s 10-year yield advanced eight basis points to 4.36%

Commodities

• West Texas Intermediate crude rose 0.7% to $70.58 a barrel
• Spot gold rose 0.3% to $2,592.21 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Winnie Hsu.

©2024 Bloomberg L.P.