Asian stocks remained near two-week lows and the dollar hit all-time highs against the Australian and New Zealand dollars on Wednesday, ahead of an expected cut in U.S. interest rates.
In Japan, auto stocks jumped on hopes that talks between Honda and Nissan herald industry consolidation.
The S&P 500 fell 0.4% overnight, but MSCI’s index of stocks in the Asia-Pacific region, excluding Japan, rose 0.5% in early trading.
Japan’s Nikkei was down 0.3%, but a record 22% jump in Nissan shares helped materialize gains in the sector as investors welcomed the prospect of cost-cutting consolidation. Shares of Honda, whose market capitalization is five times that of Nissan, fell 1.6%.
Honda and Nissan – Japan’s second and third largest automakers, behind Toyota – are in talks to create a holding company, according to a person with knowledge of the matter, which would allow them to share more resources.
The companies said no mergers had been announced, but investors welcomed the prospect of closer ties as margins came under severe pressure from Chinese electric vehicles.
Mitsubishi Motors jumped 14%, while Mazda gained 4%.
Later in the day, the Federal Reserve is expected to cut the federal funds rate by 25 basis points – from its current range of 4.5-4.75% – but offer a cautious outlook and likely revise upward its projections for long-term interest rate.
Markets only expect further US easing of around 50 basis points in 2025, which would leave rates around 3.8%. This figure is much higher than Fed members’ median projection for rates at 3.4% at the end of next year and for a long-term neutral rate of 2.9%, fueling speculation that the Fed could act to respond to the market.
“The market reaction should focus on communication and potential direction towards further reductions,” said David Doyle, head of economics at Macquarie.
“We expect a hawkish change in the dot plot, consistent with the movement in market expectations since the last update in September.”
Traders pushed up U.S. yields and the dollar, with benchmark 10-year yields hitting a one-month high of around 4.4% overnight, before settling at 4.39%.
Moves in the Asian session were small but reflected overall dollar strength, with the Australian dollar nearing a one-year low against the US dollar at $0.6325 and the New Zealand dollar at a two-year low of $0.5748.
The euro was under pressure at $1.0502 and the yen fell slightly to 153.6 per dollar. [FRX/]
HIGHER FOR LONGER
Bond markets, particularly outside Europe, also appear to be bracing for higher interest rates.
In Japan, the chance of a rate hike on Thursday is 20%, but higher rates are a matter of time, with more than 40 basis points of hikes expected by the end of 2025.
An unexpected rise in British wages has led to a wave of gilt selling, reduced expectations for rate cuts and a rise in the pound sterling, which at $1.2710 is stable for the year and is the best performing currency in the G10 against the dollar.
Sterling is also within range of the euro’s post-Brexit highs and the gap between 10-year gilt yields and German bund yields is the widest since 1990 and wider than the gap between rates Americans and the Bunds.
“Given the euro zone’s political and growth problems, we don’t expect the pound to weaken much against the euro,” said Kit Juckes, a strategist at Société Générale, although Nor does he expect a spectacular fall in the euro on the foreign exchange market.
In energy markets, European gas prices rebounded overnight on renewed concerns over Russian supplies via Ukraine as the transit deal expires at the end of the year.
Weakness in the German and Chinese economies weighed on oil prices, keeping Brent futures at $73.34 per barrel.
Rising yields weighed on gold, which traded at $2,650 an ounce. Bitcoin held just below its all-time high at $105,393.
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