Asian equity markets are expected to perform positively, reflecting a stronger position in the global markets as bullish bets are back to the game. This uptrend is fuelled by higher projections of US jobless claims, which have led to speculations of an early Federal Reserve rate cut in 2024. This shift in expectations indicates that the delayed effects of monetary policy are becoming apparent, prompting market participants to quickly reposition their strategies. The focus is transitioning from curbing inflation to stimulating growth and avoiding a recession.
Notably, the anticipated US rate cuts might be less drastic than previously thought, as US inflation remains significantly above the Federal Reserve’s 2% target. Moreover, the recent rally in equity and bond markets has altered the risk/reward balance. While there still seems to be a moderate upside potential, it may follow a brief pause. The US short-term markets have also adjusted their expectations for rate cuts, now forecasting a near 100 basis point reduction in 2024, a slight increase from the earlier prediction of 90 basis points. The probability of a rate cut in June is fully priced in, with an 80% likelihood in May and 30% in March.
On the FX front, attention remains on the US Dollar and US Treasury price action. It’s worth monitoring the foreign exchange market closely to better understand these risks and how participants are moving capital going to the year-end. The Chinese Yuan, for instance, has made modest gains against the Dollar following a meeting between Presidents Xi Jinping and Joe Biden. In this meeting, President Biden emphasized the importance of managing competition between the US and China effectively and reiterated the US’s commitment to the Asia-Pacific region. He described his talks with Xi as “candid and constructive,” asserting that the US is not seeking conflict.
On the economic front, with major data releases now behind us, market participants may adjust their hedging strategies in anticipation of the US options expiry later in the session. Consequently, technical trades are likely to dominate market activity for the time being.
