Asian markets face volatility as bond yields surge

December 16, 2024 (MLN): Asian stock markets were cautious on Monday as rising bond yields put pressure on equity valuations, especially in the expensive tech sector, as Reuters reported.

This cautiousness comes during a week filled with central bank meetings and significant economic data releases.

Figures from China released on Monday showed retail sales increased by only 3.0% in November compared to a year earlier, falling short of market forecasts of 4.6% and highlighting the need for more aggressive stimulus. 

Industrial production met expectations, while house prices continued to decline, though at a slower rate.

China's blue-chip index blue-ceased 0.2%, having dropped more than 2% last Friday.

Over the weekend, an official at China's central bank said it had room to cut the reserve requirement ratio further, though credit numbers from last week showed that past easing had done little to boost borrowing.

Interest rates are expected to fall in the United States and Sweden later this week, and hold steady in Japan, the UK, and Norway.

The Federal Reserve will lead the pack on Wednesday with markets pricing a 96% probability it will cut rates by 25 basis points to a new range of 4.25% to 4.50%.

More important will be any guidance on future easing, including the "dot plot" forecasts of Fed members for rates over the next couple of years.

"We look for the updated dots to signal a median expectation for three cuts next year, down from four in the September projection," said JPMorgan economist Michael Feroli.

"The median longer-run dot, which was 2.875% in September, we see moving up to 3% or maybe even 3.125%."

"That said, given the vagaries of trade and other policies next year, the signal from the dots maybe even less useful than ordinarily."

Investors have been steadily lowering their expectations for how far interest rates might decline, partly due to solid economic data.

Additionally, there is speculation that President-elect Donald Trump's proposed tax cuts and tariffs could increase government borrowing and drive inflation higher.

Futures imply only two more cuts next year and rates bottoming out at around 3.80%, much higher than just a few months ago.

That outlook took a heavy toll on the Treasury market last week, where longer-dated yields recorded their largest weekly rise this year.

Yields on 10-year notes were up at 4.39%, having climbed 24 basis points last week alone, and threatening to breach a major bear target at 4.50%.

Rising yields make bonds more attractive than equities while lifting the level that future cash flows are discounted at and possibly the cost of capital for companies.

Bitcoin was also in the spotlight, surging to a record high above $105,000 as it extended gains on bets Trump's return will usher in a cryptocurrency-friendly regulatory environment.

S&P 500 futures and Nasdaq futures were a fraction firmer on Monday. 

EURO STOXX 50 futures crept up 0.1%, while DAX futures gained 0.2% and FTSE futures 0.1%.

MSCI's broadest index of Asia-Pacific shares outside Japan was little changed, having been flat last week.

Japan's Nikkei edged up 0.1%, while South Korea steadied on pledges of government support.

A range of surveys on global manufacturing are also due on Monday, while U.S. retail sales will be released on Tuesday, and a major inflation report on Friday.

The Bank of Japan, Bank of England, and Norges Bank are expected to stand pat on Thursday, while the Riksbank is seen cutting rates, perhaps by 50 basis points.

In currency markets, the dollar has been underpinned by rising yields. 

That has put the squeeze on a raft of emerging market currencies, forcing intervention in some cases.

The dollar likewise held firm on the yen at 153.93, having jumped almost 2.5% last week. The dollar index stood at 106.870, after rising 0.9% last week.

The euro looked wobbly at $1.0518, not helped by news ratings agency Moody's unexpectedly downgraded France on Friday.

The action came a few hours after French President Macron appointed veteran centrist Francois Bayrou as the country’s fourth premier in a year.

Political uncertainty was also clouding South Korea where the finance ministry promised to support markets after the impeachment of President Yoon Suk Yeol.

A firm dollar combined with higher bond yields to restrain gold at $2,651 an ounce.

Oil prices were supported at around three-week highs by expectations that additional sanctions on Russia and Iran could tighten supplies.

Brent was down 13 cents at $74.36 a barrel, while U.S. crude eased 22 cents to $71.07 per barrel.

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