Asian stocks surge pre-U.S. CPI; Nikkei breaks 35,000 mark

As Asian stocks rally in anticipation of the U.S. Consumer Price Index (CPI), the Nikkei breaches the 35,000 milestone, setting the stage for a dynamic market dance ahead. Investors brace for potential impacts on global markets as economic indicators take centre stage.

Asian stocks rose on Thursday ahead of U.S. inflation data that could influence the Federal Reserve’s thinking on rate cuts, while the crypto world gained traction after the United States approved exchange-traded funds (ETFs) to track bitcoin.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.67 per cent, ending a seven-day losing streak.

In a blistering start to the year, Japan’s Nikkei broke through 35,000 for the first time since February 1990, after rising 28% in 2023, its best yearly performance in a decade. On Thursday, the Nikkei was up 1.9% at 35,085 points.

China stocks, on the other hand, remained near 5-year lows as investor sentiment remained subdued. In early trading, the blue-chip CSI 300 Index edged higher, while Hong Kong’s Hang Seng Index rose 1.5%.

On Wednesday, U.S. stocks concluded with an upward trend driven by the rally in mega-cap stocks. However, the extent of the gains was constrained in anticipation of upcoming inflation reports and significant bank earnings later in the week. The S&P 500 e-mini futures rose 0.14 per cent.

The consumer price index (CPI) report for the United States is due later on Thursday. According to a Reuters poll, core CPI will remain unchanged at 0.3% from the previous month, while year-on-year inflation will slow to 3.8% from 4% in November.

“The risk is that markets will sell off in response to a strong print,” said Ben Bennett, APAC investment strategist at Legal and General Investment Management (LGIM). “The reaction could be more muted if we get a soft number.”

Investors are carefully navigating a landscape marked by evolving expectations of Federal Reserve rate cuts, a historic breakthrough in the realm of Bitcoin ETFs, and the ever-fluctuating dynamics of the oil market as global markets reach a critical juncture.

Investors have been rethinking their assumptions about the magnitude and timing of potential Federal Reserve rate cuts since the beginning of the year. Fed futures prices now show a consensus expectation of 140 basis points of easing this year, up from a previous projection of 160 basis points by the end of 2023. According to the CME FedWatch tool, the market is currently pricing in a 67% chance of a rate cut in March.

Despite this speculation, Federal Reserve Bank of New York President John Williams has advised caution, stating that calling for rate cuts is premature. He emphasized that the central bank still has a long way to go before reaching its 2% inflation target. This prudence reflects the Fed’s delicate balancing act of weighing economic indicators against the need for monetary policy adjustments.

Amid these discussions, market observers are pointing to indications that investors may be underestimating the risk of a US recession. According to LGIM’s Bennett, soft Consumer Price Index (CPI) prints may be indicative of disappointing demand, though the impact of such signs may be on the horizon.

The approval of bitcoin ETFs, according to Antoni Trenchev, co-founder of crypto-services firm Nexo, is a watershed moment, possibly rivalling the cryptocurrency’s launch. He adds a forward-looking perspective, emphasizing the upcoming halving in April, which has historically triggered new bull markets. According to Trenchev, the combination of these factors could propel Bitcoin to $100,000 by 2024.

As markets digest the impact of the bitcoin ETF approval, attention shifts to the traditional financial sector as earnings season begins. JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are all scheduled to report earnings on Friday. The findings of these reports will be closely scrutinized because they provide insights into the financial industry’s health and broader economic trends.

Simultaneously, the Japanese yen remains under pressure in the currency market, trading at 145.35 per dollar. This depreciation follows data showing that Japanese workers’ real wages fell for the 20th consecutive month in November, contradicting officials’ desire for wage increases before tightening policy. While major currencies remain stable ahead of the US inflation report, the yen’s struggles highlight the Japanese economy’s challenges.

The global oil market, a constant in market dynamics, has its own set of fluctuations. U.S. crude has risen to $71.60 per barrel, while Brent has recovered from a previous drop caused by concerns about a surprise increase in U.S. crude stockpiles. These movements highlight the oil market’s sensitivity to supply and demand dynamics, geopolitical events, and broader economic sentiment.

The financial landscape has reached a fork in the road, where the complexities of Fed rate cut speculation, the historic approval of bitcoin ETFs, and the ever-shifting dynamics of the oil market converge. As these factors interact to shape market sentiment and direction, investors and traders alike are bracing for increased volatility. As the world observes these developments, the coming days promise to be a dynamic and potentially transformative period for global financial markets.