December 18, 2024 (MLN): Asian stocks were trading close to their lowest levels in two weeks, while the U.S. dollar reached significant highs against the Australian and New Zealand dollars on Wednesday, as Reuters reported.

This came as markets awaited an anticipated U.S. interest rate cut.

In Japan, auto shares leaped on hopes that talks between Honda and Nissan heralded industry consolidation.

The S&P 500 edged 0.4% lower overnight but MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5% in early trade 

Asian stocks hovered near two-week lows and the dollar hit milestone highs against the Australian and New Zealand dollars on Wednesday in the countdown to an expected U.S. interest rate cut.

In Japan, auto shares leaped on hopes that talks between Honda and Nissan heralded industry consolidation.

The S&P 500 edged 0.4% lower overnight but MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5% in early trade.

Japan's Nikkei was 0.3% lower but a record 22% jump in Nissan shares led gains in the sector as investors cheered the prospect of consolidation bringing down costs. 

Shares in Honda, whose market cap is five times larger than that of embattled Nissan, fell by 1.6%.

Honda and Nissan – Japan's second and third-biggest automakers, behind Toyota, to set up a holding company, according to a person knowledgeable about the matter, a move that would allow them to share more resources.

The companies said no merger had been announced but investors cheered the prospect of closer ties as margins have come under intense pressure from Chinese electric vehicles.

Mitsubishi Motors jumped 14% while Mazda gained 4%.

Later in the day, the Federal Reserve is expected to move the Fed funds rate window 25 basis points lower – from its current 4.5-4.75% range – but to offer a cautious outlook and probably lift its long-run interest rate projections.

Markets expect only about 50 basis points of further U.S. easing in 2025, leaving rates around 3.8%. 

That is much higher than Fed members' median projection for rates at 3.4% at the end of next year and for a long-run neutral rate of 2.9%, which is driving the Fed may move to meet the market.

"The market reaction is likely to focus on the communication and potential guidance for further cuts," said David Doyle, head of economics at Macquarie.

"We foresee a hawkish shift in the dot plot, consistent with the movement in market expectations since the last update in September."

Traders have been driving up U.S. yields and the dollar, with benchmark 10-year yields touching one-month highs around 4.4% overnight, before settling at 4.39%.

Moves in the Asia session were small but highlighted the dollar's overall strength.

The Australian dollar slipped to a one-year low against the U.S. dollar at $0.6325, while the New Zealand dollar fell to a two-year low at $0.5748.

The euro was under pressure at $1.0502 and the yen dipped slightly to 153.6 per dollar.

Bond markets, especially outside Europe, also seem to be girding for a higher interest rate future.

Pricing in Japan implies a 20% chance of a rate hike on Thursday – but that higher rates are a matter of time with more than 40 bps of hikes priced in by the end of 2025.

A sharp rise in British wages led to a sell-off in gilts, reduced rate cut expectations, and boosted sterling, making it the best-performing G10 currency against the dollar this year at $1.2710.

Sterling is also within the range of post-Brexit highs on the euro and the gap between 10-year gilt yields over German bund yields is its widest since 1990 and wider than the gap between U.S. rates and bunds.

"Given the political and growth woes of the Eurozone, we don't expect sterling to weaken much against the euro," said Kit Juckes, strategist at Societe Generale, though he doesn't see the euro falling dramatically on the cross either.

In energy markets, European gas prices rebounded overnight on renewed concern about Russian supply via Ukraine, as a transit agreement expires at the end of the year.

Weak economies in Germany and China weighed on oil prices, keeping Brent crude futures at $73.34 a barrel.

The rise in yields has kept a lid on gold which was trading at $2,650 an ounce. Bitcoin hovered just below record highs at $105,393.

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Posted on: 2024-12-18T10:43:05+05:00