Market Optimism Returns as Inflation Fears Ease
After a tumultuous week, Asian shares rebounded on Monday, buoyed by a benign US inflation reading that reignited hopes for further policy easing in 2025. The news brought relief to investors, who were also pleased that Washington had avoided a government shutdown.
Central Banks Take a Backseat
This week, the spotlight shifts away from central banks, with only a few meeting minutes scheduled for release. The lack of Federal Reserve speeches and secondary US data means investors will focus on other market drivers.
Dollar Strength Continues
The dollar remains strong, supported by a robust economy and higher bond yields. This has put pressure on commodities and gold, making it a challenging environment for emerging market countries. They are struggling to prevent their currencies from depreciating too rapidly, which could stoke domestic inflation.
Asian Markets Rally
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%, while Japan’s Nikkei surged 1.2%. The Topix automaker index climbed 1.3%, driven by rumors of a potential merger between Honda and Nissan. South Korean shares gained 1.3%, and Taiwan’s market jumped 2.6%. Chinese blue chips rose 0.7%, despite the central bank’s efforts to stem the decline in 10-year bond yields, which hit a record low of 1.665%.
European Markets Mixed
EUROSTOXX 50 futures dipped 0.2%, while FTSE and DAX futures were near flat. In contrast, S&P 500 futures added 0.4%, and Nasdaq futures firmed 0.6%.
Wall Street’s Concentration Concerns
Analysts at BofA noted that the S&P 500’s 23% gain this year is largely driven by its 12 largest companies. If these companies are excluded, the gain drops to 8%. This concentration of performance is a vulnerability heading into 2025.
Fed Rate Cut Expectations
Fed funds futures now imply a 53% chance of a rate cut in March and 62% for May. However, the market only expects two quarter-point easings to 3.75-4.0% for all of 2025. This is a significant shift from earlier expectations of rates bottoming around 3.0%.
Bond Market Pressure
The prospect of fewer rate cuts, combined with expectations of increased government spending, has put pressure on bond markets. Ten-year yields have surged almost 42 basis points in just two weeks, the largest increase since April 2022.
Currency Markets
The dollar index held near two-year highs at 107.720, having climbed 1.9% for the month so far. The euro looked vulnerable at $1.0441, while the yen faces threats of Japanese government intervention if it challenges the 160.00 barrier.
Commodity Prices
Gold stood at $2,625 an ounce, having slipped 1% last week. Oil prices edged higher, but the strong dollar and concerns over Chinese demand remain a burden. Brent rose 36 cents to $73.29 a barrel, while U.S. crude gained 40 cents to $69.86 per barrel.
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