Interest rate bets push Asia shares to five-month highs

Sydney — Asian shares touched five-month highs on Thursday as market wagers on evermore aggressive rate cuts extended a huge rally in US stocks and bonds, but also left plenty of scope for disappointment in 2024.

The S&P 500 has climbed 14% in just two months to within a whisker of its all-time closing peak, while its price to earnings ratio is up by a quarter on the year at 24.0.

MSCI’s broadest index of Asia-Pacific shares outside Japan has also gained 10% in two months and added another 0.3% on Thursday to its highest since August.

Japan’s Nikkei was off 0.4% as a rebound in the yen has kept its gains for December to a minimum.

Chinese shares have generally missed out on the global cheer as foreign investors shun the country, worried about the economy’s faltering recovery and tensions with the US. Blue chips were up 0.5% on Thursday, but are down 4% for December so far.

EUROSTOXX 50 futures added 0.3% and FTSE futures 0.2%. S&P 500 futures edged up 0.1% to another record high, while Nasdaq futures firmed 0.2%.

A lack of major news has not stopped investors from ramping up bets on rapid-fire rate cuts from the Federal Reserve. Futures now imply an 88% chance of a rate cut as early as March, a huge swing from a month ago when the probability was just 21%.

The market has about 157 basis points of easing priced in for 2024, and sees rates reaching 3.00-3.25% over 2025.

“The rapid decline in inflation is likely to lead the Fed to cut early and fast to reset the policy rate from a level that most participants will likely soon see as far offside,” wrote analysts at Goldman Sachs in a note.

“We expect three consecutive 25 basis point cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25%-3.5% in 2025 Q3. Our forecast implies five cuts in 2024 and three more cuts in 2025.”

Yields on 10-year Treasury notes stood at 3.812%, having hit a five-month low overnight. The two-year yield was down at 4.273%, after being as high as 5.295% as recently as October.

The falls weighed broadly on the US dollar and lifted the euro to its highest since July at $1.1129. The single currency was last at $1.1115, having gained 2% so far this month to within sight of its 2023 top of $1.1276.

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