In the wake of a pullback in U.S. stocks last week from their nearly all-time highs, Asian equities seem poised to commence the new year on a downward trajectory. Analysts attribute the recent dip in the U.S. market to year-end dynamics and potential concerns regarding an overestimation of rate-cut expectations.
Typically, strains in funding markets intensify towards the year-end as banks scale back operations to fortify their balance sheets for regulatory compliance. This reduction prompts market participants to adjust their activity, trim assets, or face elevated funding costs.
Beyond the year-end dynamics and the sparsely covered Wall Street trading desks, a prevailing belief persists that the recent Fed rate cuts, influencing capital market trends over the past eight weeks, continue to shape sentiment in the stock market. While a robust U.S. jobs report could challenge this conviction, a complete reversal would necessitate a resurgence in realized inflation, prompting a notably more assertive hawkish stance from Chair Powell and other key figures to dissuade bets on rate cuts in March or May.
The central question occupying market participants revolves around reconciling the disparity between market-based rate cut expectations and the Fed’s projections. Presently, no one is sounding alarm bells, relying on the emergence of lags in labor and consumption metrics to justify expectations of 150 basis points of cuts in 2023.
Adding to the complexity of the market landscape, the onset of 2024 faced an inauspicious start with a magnitude 7.6 earthquake (7.5 on the U.S. Geological Survey scale) striking the Noto peninsula in Japan. This seismic event led to building collapses, trapped individuals, and prompted evacuation orders due to potential tsunami concerns.
Japan, a region accustomed to earthquakes of varying intensities, witnessed a significant quake. Fortunately, it did not escalate into a catastrophic event. Initial reports prompted Japanese authorities to issue a substantial tsunami warning, anticipating waves as high as 16 feet. However, subsequent updates allayed fears, indicating that the highest waves were likely no larger than 10 feet, mitigating concerns of a more severe impact.