Year-end rally in Asian markets as expectations strengthen for a Fed rate cut

Stock indices rise from Tokyo to Europe, yuan weakens, and investors focus on rates, geopolitics, and U.S. macro data.

Asian stock markets closed a positive session, supported by a climate of greater global optimism and by the prospect of an interest-rate cut by the Federal Reserve as early as the December meeting. The rebound was led by Japan, with the Topix and Nikkei 225 gaining more than 2%, while technology indices in South Korea and Taiwan showed more caution. The MSCI Asia Pacific Index rose 0.8%, driven mainly by cyclical sectors such as industrials and financials, which have been standouts over the past month along with materials and energy.

Sentiment was boosted by weak data on the U.S. labor market: in November, U.S. companies recorded the largest drop in employment since the start of 2023, a signal that strengthens the expectation of an imminent first rate cut. According to traders, the probability of a 25-basis-point reduction now exceeds 90%.

In foreign exchange markets, China surprised by setting a weaker-than-expected reference rate for the yuan, pushing the currency slightly lower both onshore and offshore. The yen, on the contrary, strengthened following reports of a possible interest-rate hike by the Bank of Japan before year-end. In India, the rupee hit a record low, weighed down by uncertainty surrounding trade negotiations with the United States.

On the bond front, attention was focused on Japan: the auction of 30-year government bonds saw the strongest demand since 2019, with long-term investors - including Nomura - returning to accumulate JGBs. In other Asian regions, yields rose, particularly in Australia, where expectations are increasing for a more aggressive monetary policy stance against inflation.

Among commodities, gold and silver fell, while oil advanced. Bitcoin remained stable around $93,000. Meanwhile, on the geopolitical front, the meeting in Beijing between Xi Jinping and Emmanuel Macron brought key issues - including trade, Taiwan, and the war in Ukraine - back to the center of the debate.

Attention now turns to the upcoming U.S. data, particularly the report on income, spending, and PCE inflation, which will offer decisive indications on the Fed’s direction.

Andrea Pelucchi