Global stocks rallied amidst strengthening expectations of Fed rate cuts

Sensex is trading higher today while Asian stocks are trading mixed

Aditi Gupta,

Economist,

Bank of Baroda

Mumbai, December 28, 2023: Global stocks continued to rally amidst strengthening expectations of Fed rate cuts. As per the CME Fed Watch tool, the probability of a rate cut in Mar’24 stands at 72.7%. Separately, macro data from Asia painted a mixed picture. Industrial production in South Korea rose at a solid pace of 3.3% in Nov’23 on a MoM basis versus estimate of a 1.4% increase. This was led by a sharp uptick in production of semi-conductors. On the other hand, industrial production in Japan fell by 0.9% in Nov’23 (MoM), following an increase of 1.3%. Separately, retail sales increased by 1% in Nov’23, after declining by 1.7%. In China, industrial profits rose by 29.5% in Nov’23, compared with 2.7%. However, the recovery was uneven, with the property sector continuing to post a lacklustre performance. In India, RBI’s report highlighted a healthy growth in balance sheet of both banks as well as NBFCs led by a pickup in credit growth. Asset quality and profitability also noted an improvement in H1FY24.

Equity markets closed higher. Traders ramped up expectations of a pivot in monetary policy cycle of major central banks in the last trading week of the year, with anticipation of ~ 150bps rate cut by Fed next year. Hang Seng rose the most, followed by Nikkei.  Sensex rose by 1%, led by auto and banking stocks. It is trading higher today while Asian stocks are trading mixed.

• Barring INR and CNY, other global currencies appreciated against the dollar. Prospects of lower Fed rates weighed on the dollar, with the DXY falling by 0.5%. EUR and GBP rose by 0.6%. INR depreciated by 0.2%, amidst increased dollar demand. However, it is trading stronger today, in line with its Asian peers.
• Global yields felt the reverberation of expectation of Fed rate cut in the coming year. US 10Y yield fell the most by 10bps. Even Germany and UK’s 10Y yield fell by 8bps and 7bps respectively. India’s 10Y rose by 2bps amidst tight liquidity conditions. Notably, the result of 2 day VRR showed that bids received were of much higher quantum.  India’s 10Y yield is trading at 7.20% today.

(The views expressed in this research note are personal views of the author(s) and do not necessarily reflect the views of Bank of Baroda. Nothing contained in this publication shall constitute or be deemed to constitute an offer to sell/ purchase or as an invitation or solicitation to do so for any securities of any entity.)