Asian Stocks Rally: In a marked response to the U.S. Federal Reserve‘s shift towards a dovish stance and the conclusion of its tightening cycle, Asian stocks experienced a robust rally on Thursday. The Fed’s decision to maintain interest rates and the assurance from Chairman Jerome Powell that the tightening of monetary policy is likely over resonated across financial markets.
MSCI’s broadest index of Asia-Pacific shares outside Japan exhibited a notable 1.8% surge, marking its most significant one-day percentage jump in a month. Mainland Chinese blue chips saw a modest increase of 0.2%, while Hong Kong’s benchmark advanced by 1.2%. Australian shares also joined the rally, posting a 1.6% increase. However, Japan’s Nikkei faced headwinds, sliding 0.7%, influenced by the sharp rally of the yen.
The Federal Reserve’s decision to leave interest rates unchanged and the indication that its historic tightening cycle might be concluding came as a pivotal moment. Jerome Powell affirmed that inflation was falling faster than anticipated, leading to a near-unanimous projection by 17 of 19 Fed officials that the policy rate would be lower by the end of 2024. U.S. fed funds futures signaled an increased likelihood of rate cuts starting as soon as March, with the market pricing in over 150 basis points of easing next year.
State Street Asia Limited’s Ben Luk described the Fed’s pivot as “very aggressive,” aligning with market expectations. This shift is expected to have a varied impact in Asia, with tech shares poised to benefit more, while markets like Japan could face dampening effects due to a strengthening yen against a weakening U.S. dollar.
Also Read: Asian Stocks Rally Amid Global Optimism, Setting the Stage for Best Month in 10
Christian Scherrmann, U.S. economist at DWS, characterized the Fed’s stance as more dovish than expected but emphasized the importance of remaining vigilant, highlighting that the timing of rate cuts hinges on evolving data, particularly inflation. The week remains eventful for central banks, with the European Central Bank, Bank of England, and Swiss National Bank announcing policy decisions on Thursday. The Bank of Japan is scheduled for its turn on Tuesday.
Following the Fed’s announcement, U.S. stocks closed significantly higher, and benchmark Treasury yields reached their lowest level since August 10. U.S. stock futures indicated a 0.4% rise on Thursday, while the 10-year Treasury yield continued its descent below the psychological 4% mark.
The U.S. dollar index, measuring the greenback against a basket of currencies, saw a further 0.25% decline to 102.62. The euro gained 0.2%, reaching $1.0899, while the yen exhibited notable strength, causing the dollar to slide 0.7% to 141.82 yen.
In the commodities market, spot gold witnessed a 0.23% increase, reaching $2,030.99 per ounce, following a substantial 2.4% rise on Wednesday. Oil prices also extended gains, with Brent futures settling at $74.49 a barrel, up by 0.31%, and U.S. West Texas Intermediate crude settling at $69.58 a barrel, marking a 0.16% increase. The overall market sentiment remains optimistic as the dovish stance from the Fed reverberates across various asset classes.
Our Reader’s Queries
Does the Federal Reserve affect the stock market?
Typically, when the Federal Reserve lowers interest rates, the stock market tends to rise. Conversely, when the Federal Reserve increases interest rates, the stock market tends to decline.
What caused the stock market rally after the Federal Reserve lowered interest rates?
Lower interest rates are a favorite of Wall Street as they ease the strain on the economy and boost prices for various investments. The markets have been on an upswing since October, with optimism growing that cuts may be in the pipeline.
Does Federal Reserve buy stocks?
The Federal Reserve employs open market operations to purchase or sell securities from banks. By purchasing securities, the Fed increases the amount of money that banks can hold as reserves on their balance sheets. Conversely, when the Fed sells securities, it reduces the amount of money available to banks, thereby decreasing the overall money supply.