Asian stocks rise as the fever of reducing U.S. interest rates continues

Asian stocks followed Wall Street in rising on Wednesday, as the fever of reducing U.S. interest rates continued. Meanwhile, oil maintained its gains from the past two days after Houthi militants attacked ships in the Red Sea, disrupting maritime trade.

The yen incurred losses near a one-week low, and Japanese yields continued their decline after the Bank of Japan kept its policy stable and provided no indication of when it might end negative interest rates, reinforcing risk appetite.

Europe is expected to open higher, with futures for the EUROSTOXX 50 rising by 0.3 percent and FTSE futures up by 0.3 percent. Futures for the Standard & Poor’s 500 and Nasdaq rose by 0.1 percent.

In Asia, the broader MSCI index for Asia-Pacific stocks excluding Japan rose by 0.8 percent, reaching a new 4-month peak. This was supported by a 1.1 percent gain in Hong Kong stocks and a 1.6 percent jump in South Korea.

Chinese stocks, however, reflected a different trend, with key stocks falling by 0.5 percent after the central bank left lending rates unchanged, as widely expected.

The Nikkei index in Japan rose by 1.7 percent, approaching its highest level in 33 years. The yen remained steady at 143.66 against the dollar, after a overnight decline of 0.8 percent. The yields on the benchmark 10-year bonds dropped by another 7.5 basis points to 0.56 percent, marking the lowest level since early August.

During the night on Wall Street, the Dow Jones index rose by 0.7 percent, recording its highest closing level ever. The Nasdaq Composite index added 0.7 percent, reaching its highest level since January. The S&P 500 index rose by 0.6 percent.

The rise was driven by an unexpectedly dovish tone from the U.S. Federal Reserve Chairman Jerome Powell last Wednesday regarding expectations of interest rate cuts next year. The stock market seemed less concerned about subsequent resistance from other Federal Reserve officials.

On Tuesday, the Richmond Federal Reserve President, Thomas Barkin, welcomed the decline in inflation but refrained from mentioning how it would impact his policy outlook for the coming year. The Atlanta Federal Reserve President, Raphael Bostic, stated that there is no urgent need to cut interest rates.

Analysts at JPMorgan anticipate a more challenging backdrop for stock markets next year, as the recent dovish turn is expected to pose significant headwinds to corporate margins. They added that they prefer cash and bonds.

They told clients, “There is now consensus that a recession will be avoided, while equity valuations appear rich, credit spreads tight, and volatility unusually low,” and continued, “Therefore, even in the optimistic scenario, we believe the upside for risk assets is limited.”

A survey conducted by Bank of America on Tuesday showed that investors turned more bullish in December, buying stocks and reducing their cash holdings. They had the largest overweight position in bonds since 2009.

The decline in yields also supported stock valuations, with the benchmark 10-year yields dropping by one basis point to 3.9125 percent, slightly higher than its five-month low at 3.8850 percent. Meanwhile, two-year yields fell by two basis points to 4.4219 percent, approaching its seven-month low at 4.2820 percent.

In other areas, oil prices were affected by concerns about disruptions in the Red Sea as Houthi rebels intensified attacks on commercial ships. The United States announced the formation of a task force to protect trade in the region.

Futures for U.S. crude oil remained relatively unchanged at $73.98 per barrel, after rising over 1 percent on Tuesday, while Brent crude stabilized at $79.20 per barrel.

S&P Global Market Intelligence expects that the three major shipping alliances are likely to halt all services covering up to 85 percent of all container fleet passages in the Suez Canal.

Chris Rogers, Head of Supply Chain Research at Standard & Poor’s, stated, “The decline in goods transit through the Suez may lead to a divergence in oil, refined oil, and other basic commodities between Asian markets and the Atlantic basin, possibly causing further price volatility.” The spot gold price remained steady at $2039.70 per ounce.