(Bloomberg) — Asian stocks are expected to open broadly mixed over the weekend on increased speculation about U.S. Federal Reserve interest rate cuts and elections in Taiwan.
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Stock futures in Australia and Hong Kong pointed to an early rise in early trading, while contracts in Japan fell. The S&P 500 was little changed on Friday, posting a weekly gain after U.S. producer prices fell unexpectedly, confirming bets on a Fed rate cut in March.
Traders will monitor Taiwan's assets after the Democratic Progressive Party won the presidential election and the more China-friendly Kuomintang won too few seats to control the assembly. China's reaction to the weekend's results has so far been muted, while the DPP's loss of its majority in parliament raises the prospect that the major parties will have to cooperate on policy.
With the result largely in line with opinion polls before the vote, “we expect a minimal reaction from global financial markets to the election result,” Commonwealth Bank of Australia strategists led by Joseph Capurso wrote in a note to clients.
Read more: Taiwan election result forces compromise to boost markets
The steady start in Asia comes as the gauge of global stocks is off to a rocky start this year, after rallying 11% last quarter – its biggest gain in three years – amid euphoria over AI and betting that the global interest rate hike cycle is complete. However, Chinese stocks have slumped on consumer spending, while Japanese shares hit their highest since 1990 last week as decades of deflation ease and a weak yen supports exporters' profits.
“I expect a pause/pullback from here,” Rick Bensignor, president of Bensignor Investment Strategies and a former strategist at Morgan Stanley, said in a note on Japanese stocks. “But this long-overlooked market woke up a year ago and it continues to be a place to have money.”
The story goes on
Producer prices fall
Meanwhile, bond markets came under pressure as key inflation and employment data painted a mixed picture of the U.S. economy. Treasury bonds rallied on Friday after the U.S. producer price index for final demand fell for a third straight month. Swap traders see a nearly 80% chance that the Fed's easing cycle will begin in March, up from about 62% at the start of last week, according to data compiled by Bloomberg.
The market is pricing in nearly 170 basis points of rate cuts this year, which “continues to strike us as unduly aggressive, particularly as real sector data could show the U.S. economy continuing to grow above the Fed's estimated pace of 1 in 4Q23 “Grown .8%” is the non-inflationary speed limit,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “Real industry data in the coming days may lead to some reduction in aggressive betting.”
Read more: Bond bulls fixated on Fed cuts risk being punished
After the big rally in the fourth quarter, investors are focused on the results that companies need to show on their earnings scorecards. On Friday, Wall Street's biggest banks took turns calling for an end to the record run of their biggest source of income. Wells Fargo & Co. surprised analysts by forecasting a 9% decline in net interest income for 2024, while Citigroup Inc. forecast a slight decline this year. Even JPMorgan Chase & Co., which expects its 2024 transportation volume to remain at 2023 levels, predicts it will decline throughout the year.
In addition to more U.S. earnings reports, investors this week will focus on inflation numbers in Germany and Britain, as well as a number of political leaders and officials, including Chinese Premier Li Qiang, who is attending the annual World Economic Forum in Davos, Switzerland. A speech by Federal Reserve Governor Chris Waller after officials tried to dampen expectations of an impending interest rate cut last week will also be closely watched.
“Fed Governor Waller signaled early and clearly in October that the Fed might stop raising rates and consider a turnaround,” Stephen Gallagher, an economist at Societe General, wrote in a note to clients. “We will be watching closely to see whether financial market expectations of a rate cut in March are tempered.”
Elsewhere, oil and gold rose on Friday as the US and its allies launched airstrikes against Houthi rebels in Yemen.
Here are some of the key moves in the markets:
Shares
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0952
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The Japanese yen was little changed at 144.93 per dollar
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The offshore yuan was little changed at 7.1876 per dollar
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The Australian dollar was little changed at $0.6687
Cryptocurrencies
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Bitcoin fell 1.3% to $42,405.07
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Ether fell 2.1% to $2,518.28
Tie up
raw materials
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West Texas Intermediate crude rose 0.9% to $72.68 a barrel
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Spot gold rose 1% to $2,049.06 an ounce
This story was produced with support from Bloomberg Automation.
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