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Asian shares hit five-month highs as rate cut bets rise

European shares

MSCI’s broadest index of Asia-Pacific shares outside Japan has also advanced 10% in two months and gained another 0.3% on Thursday to its highest since August

Asian shares hit five-month highs on Thursday as market wagers on ever-more aggressive rate cuts extended a huge rally in U.S. stocks and bonds, but also left lot of scope for disappointment next year.

The S&P 500 has jumped 14% in just two months to near its all-time closing peak, while its price to earnings ratio is up by a quarter on the year at 24.0.

MSCI’s broadest index of Asia-Pacific shares outside Japan has also advanced 10% in two months and gained another 0.3% on Thursday to its highest since August.

Japan’s Nikkei dropped 0.4% as a rebound in the yen has kept its gains for December to a minimum.

Chinese shares have generally missed out on the global cheer as foreign investors shun the country, concerned about economy’s faltering recovery and tensions with the US. Blue chips were 0.5% higher on Thursday, but are 4% lower for December so far.

EUROSTOXX 50 futures gained 0.3% and FTSE futures 0.2%. S&P 500 futures rose 0.1% to another record high, while Nasdaq futures rose 0.2%.

A lack of major news has not stopped investors from ramping up bets on quick rate cuts from the Fed. Futures now imply an 88% chance of a rate cut as early as March, a huge swing from a month ago when the probability was only 21%.

The market has around 157 bps of easing priced in for 2024, and sees rates reaching 3.00-3.25% over 2025.

The rapid drop in inflation is likely to lead the Fed to cut early and fast to reset the policy rate from a level that most participants will likely soon see as far offside, Goldman Sachs analysts stated in a note.

They said: We expect three successive 25 basis points cuts in March, May, and June, followed by one cut per quarter until the funds rate reaches 3.25-3.5% in Q3 2025. Our forecast implies 5 cuts in 2024 and 3 more cuts in 2025.

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