Market Analysis

Investor Optimism Pushes Asia Stocks Higher, Dollar Dominates

Amos Simanungkalit · 24 Dec 202443.9K Views

Images Credit: Reuters

Asian stocks rose modestly on Tuesday in a week of light trading due to the holiday season, while the U.S. dollar hovered near a two-year high, supported by elevated Treasury yields as markets brace for fewer Federal Reserve rate cuts in 2025.

Chinese stocks continued their upward momentum following news of increased government support for the nation’s slowing economic recovery. The CSI300 and Shanghai Composite indices each gained 0.9%, while Hong Kong's Hang Seng Index rose 1.08%.

According to sources cited by Reuters, Chinese authorities have approved a record 3 trillion yuan ($411 billion) issuance of special treasury bonds for 2025. This announcement pushed the yield on China’s 10-year government bonds up by two basis points to 1.7125%.

The decision came shortly after the finance ministry outlined plans to boost fiscal support, including higher pensions, increased medical insurance subsidies, and expanded consumer goods trade-ins to stimulate consumption. Despite these measures, investors remain cautious about China’s economic outlook amid challenges like the ongoing real estate crisis and potential trade tensions with U.S. President-elect Donald Trump.

"China faces significant hurdles heading into 2025, including fragile consumer confidence due to the real estate crisis and a possible trade war with the U.S.," said Ronald Temple, Chief Market Strategist at Lazard. "The trajectory of China's economy and markets depends heavily on the pace and scope of government reforms."

Across the region, MSCI's Asia-Pacific shares index, excluding Japan, rose 0.44%, tracking gains from Wall Street's previous session. European futures also showed minor gains, with EUROSTOXX 50 futures inching up 0.04% and FTSE futures climbing 0.46%. However, Japan's Nikkei slipped 0.24%, while Nippon Steel shares rose 1.2% amid news that its $15 billion bid for U.S. Steel is under review by President Joe Biden, who has previously expressed opposition to the deal.

Focus on the Fed

With fewer central bank announcements this week, market attention remains on interest rate policies. Investors now anticipate about 35 basis points of Fed easing in 2025, keeping U.S. Treasury yields high and bolstering the dollar. The two-year Treasury yield was last at 4.3427%, while the 10-year yield steadied at 4.5907%.

"Federal Reserve decisions will hinge on U.S. policies related to tariffs and immigration, but the labor market’s slowdown remains their primary concern," Citi Wealth analysts commented. They maintained a projection of a 3.75% policy rate, contrasting sharply with the 20-year U.S. policy rate average of 1.7%.

Amid uncertainty surrounding Trump’s return to the White House in January, global central banks are exercising caution, factoring in the potential impact of his proposed tariffs, tax cuts, and immigration restrictions.

Meanwhile, U.S. consumer confidence unexpectedly declined in December, with post-election optimism fading and concerns over future business conditions emerging.

Currency and Commodity Markets

The dollar index remained near a two-year high at 108.14, with the euro slightly lower at $1.03955 and the yen near a five-month low of 156.99 per dollar. Japan's Finance Minister Katsunobu Kato reiterated the government's commitment to curbing excessive currency fluctuations, warning speculators of potential intervention.

Gold prices, under pressure from the strong dollar and high bond yields, stood at $2,618.10 per ounce after a 1% decline last week. Oil prices edged higher, with Brent crude futures up 0.5% at $72.99 per barrel and U.S. crude gaining 0.46% to $69.56 per barrel.