Asian Stocks Edge Up as Investors Brace for Fed Decisions

By Rae Wee
SINGAPORE (Reuters) – Asian stocks edged up on Tuesday, although movements were limited in a week shortened by holidays. The greenback remained near a two-year high, supported by elevated U.S. Treasury yields as investors prepared for fewer Federal Reserve rate cuts in 2025.

Following a series of central bank decisions, the week sees little action, highlighted by the release of Japan's October meeting minutes and Australia's December minutes. This provides insights into their choice to hold rates steady. Notably, there are no scheduled Federal Reserve speeches, and U.S. data is considered less significant at this time.

Overall themes persist, notably the dollar's strength, which is a burden on commodities and gold, and continues to pressure emerging markets such as Brazil and Indonesia, which are intervening to prevent drastic currency declines that could exacerbate domestic inflation.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.35% early in the session, mirroring overnight gains on Wall Street. In contrast, Japan's Nikkei index fell by 0.37%, while the broader Topix slipped down 0.03%.

The Committee on Foreign Investment in the U.S. (CFIUS) has reported to the White House its inability to reach a consensus on national security risks regarding Nippon Steel's bid for U.S. Steel, according to the Washington Post on Monday. Shares of Nippon Steel rose 1.5%.

In Japanese corporate news, Honda's stock surged nearly 17%, whereas Nissan's eased down by 0.07%. The companies are in discussions to merge by 2026, marking a significant shift for Japan's automotive industry amid rising competition from Chinese electric vehicle manufacturers.

In China, the CSI300 blue-chip index increased by 0.5%, and the Shanghai Composite Index advanced by 0.47%, while Hong Kong's Hang Seng Index jumped 0.7%. However, investor caution persists regarding China’s economic outlook, as the country grapples with a sluggish recovery despite promises of more governmental support.

"China faces significant challenges entering 2025. The ongoing real estate crisis has shattered consumer confidence, and a potential trade war with the U.S. could trigger the worst growth slowdown in decades," commented Ronald Temple, chief market strategist at Lazard. "Investor expectations have been raised and dashed several times in recent years, and 2025 may be no exception. The speed and scale of government reforms will likely dictate China's economic and market outlook."

Fed Outlook

In the broader market, the anticipation of fewer U.S. rate cuts in 2025 is at the forefront of investors’ assessments. Markets are pricing in approximately 35 basis points of easing for that year, contributing to rising U.S. Treasury yields and the dollar reaching new highs. The two-year Treasury yield was last at 4.3345%, while the benchmark 10-year yield stabilized around a seven-month high at 4.5825%.

"Like the markets, the Fed will need to evaluate U.S. policies on tariffs and immigration for its inflation and growth outlook. We believe that the subtle slowdown in the U.S. labor market will remain the Fed's primary concern," analysts at Citi Wealth stated. “Our base case expects a policy rate of 3.75%, which notably diverges from the 1.7% U.S. policy rate average over the past 20 years."

As U.S. President-elect Donald Trump approaches his return to the White House in January, global central banks are urged to be cautious regarding their rate strategies due to uncertainties concerning his expected tariffs, tax reductions, and immigration policies.

Data released on Monday indicated a surprising drop in U.S. consumer confidence for December as the initial post-election excitement faded and concerns about future business conditions began to surface.

In currency markets, the dollar index remained close to a two-year high at 108.11 after gaining over 2% so far this month. The euro dipped 0.04% to $1.0401, while the yen lingered near a five-month low at 157.11 per dollar.

Japan's Finance Minister Katsunobu Kato reiterated the government’s discomfort with excessive foreign exchange fluctuations, warning speculators that authorities are prepared to act to stabilize the weak yen.

The strong dollar coupled with high bond yields is weighing on gold prices, which stand at $2,615.59 per ounce after a 1% decline last week.

Oil prices saw a slight uptick, with Brent crude futures increasing by 0.37% to $72.90 per barrel, and U.S. crude rising by 0.35% to $69.48 per barrel.