Asia shares at five-month highs as rate bets pile up

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

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 economy's faltering recovery and tensions with the United States. Blue chips .CSI300 were up 0.5% on Thursday, but are down 4% for December so far.

EUROSTOXX 50 futures STXEc1 added 0.3% and FTSE futures FFIc1 0.2%. S&P 500 futures ESc1 edged up 0.1% to another record high, while Nasdaq futures NQc1 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 25bp cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25-3.5% in 2025Q3. Our forecast implies 5 cuts in 2024 and 3 more cuts in 2025."

BOND BULGE

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.

Sterling GBP=D3 reached a five-month top of $1.2812, after cracking resistance at $1.2794 overnight.

"Investors are placing more weight on Fed expectations driving currencies, than the signalling from other central banks like the ECB," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank.

"In part, that's because the Fed also has more impact on the overall global risk environment, which has become more risk friendly and thereby also less USD positive."

The dollar also lost ground to the yen at 141.49 yen, having lost 1.4% for the month. It is still up sharply for the year as the Bank of Japan takes a glacial approach to tightening its super-easy policies.

In an interview published on Wednesday, BOJ Governor Kazuo Ueda said he was in no rush to unwind those loose policies as the risk of inflation running well above 2% and accelerating was small.

The drop in the dollar and yields provided a tailwind for gold which was up at $2,083 an ounce after scoring an all-time closing high on Wednesday.

Oil prices steadied, having slid on Wednesday as concerns over supplies eased after major shippers announced they would return to the Red Sea.