Asian Shares Trade Mixed as Investors Pessimistic About US Interest Rate Cut

Asian shares traded mixed on Thursday as investors expressed pessimism about any imminent interest rate cut in the United States. The benchmark Nikkei in Japan added 0.5% in morning trading, reaching 35,637.01. Meanwhile, Australia’s S&P/ASX 200 slipped 0.5% to 7,357.40, and South Korea’s Kospi gained 0.6% to 2,450.00. Hong Kong’s Hang Seng dipped nearly 0.2% to 15,251.64, while the Shanghai Composite dropped 2.3% to 2,768.90.

This cautious sentiment spread to Wall Street, following a signal suggesting that investors may have become overly optimistic about the timing of interest rate cuts by the Federal Reserve. The S&P 500 fell by 26.77 points or 0.6%, closing at 4,739.21. This drop comes after ten weeks of gains, bringing the index near its all-time high. The Dow Jones Industrial Average also dipped by 94.45 points or 0.3%, settling at 37,266.67, while the Nasdaq Composite slumped by 88.73 points or 0.6% to reach 14,855.62.

The bond market witnessed rising yields, which put downward pressure on stocks. Yields rose due to a retail sales report that showed stronger performance in December than economists had anticipated. While this is positive news for an economy that has defied recession predictions, it may also result in upward pressure on inflation. Consequently, the Federal Reserve might postpone cutting interest rates, contrary to traders’ expectations. Lower rates would ease strain on the economy and financial system, while boosting investment prices.

The yield on the 10-year Treasury saw an immediate increase following the retail sales report, rising from 4.06% to 4.10% on Wednesday. Higher yields can impact company profits and discourage investors from paying high prices for stocks. High-growth stocks, such as Tesla (TSLA) and Amazon (AMZN), were among the hardest hit, with respective drops of 2% and 0.9% on the S&P 500. Similarly, smaller companies in the Russell 2000 index experienced a slump of up to 1.5%, eventually recovering to a loss of 0.7%.

See: Why no recession (so far, at least)? Credit the American consumer.

Market Updates: Rate Cut Expectations and Stock Prices

The recent movement in interest rates and stock prices has grabbed the attention of traders and economists alike. On Wednesday, the yield on the two-year Treasury TU00, which closely reflects expectations for the Federal Reserve (Fed), experienced a notable surge. It climbed from 4.22% to 4.34%, leading traders to adjust their forecasts for the timing of the Fed’s first rate cut. Now, there is less than a 60% probability of a rate cut occurring in March, a drop from around 70% a month ago, according to data from CME Group.

Christopher Waller, a Fed governor, commented on the situation, suggesting that the central bank may take its time with regard to future rate adjustments due to the economy’s resilience. These remarks have left the possibility of a rate cut in March open, but they also indicate that such a move is not guaranteed, according to economists at Deutsche Bank led by Amy Yang.

In a recent speech, the head of the European Central Bank (ECB), Christine Lagarde, issued a warning about the risks associated with cutting rates too early. While it is likely that the ECB will cut interest rates this summer, Lagarde emphasized that caution should be exercised.

Interest rates play a crucial role in setting stock prices, alongside corporate profits. Unfortunately, several companies reported weaker-than-expected results on Wednesday. U.S. Bancorp (USB) and Big 5 Sporting Goods (BGFV) were among them. On the other hand, Charles Schwab (SCHW) posted stronger profits for the latest quarter than anticipated by analysts. However, its stock still fell by 1.3% due to revenue falling short of estimates. Analysts suggested that the company’s better-than-expected earnings were likely influenced, in part, by more favorable tax rates.

Meanwhile, Spirit Airlines (SAVE) continued to face significant pressure as its stock plummeted by 22.5%. This decline came after a U.S. judge blocked the airline’s acquisition by JetBlue Airways out of concerns that it could lead to higher airfares. JetBlue (JBLU) also suffered a loss, dropping 8.7%.

In the energy trading market, benchmark U.S. crude (CL00) saw a slight increase of 20 cents, reaching $72.76 per barrel. Brent crude (BRN00), the international standard, remained unchanged at $77.88 per barrel.

Lastly, in currency trading, the U.S. dollar (USDJPY) experienced a marginal decrease against the Japanese yen, slipping from 148.11 yen to 148.03 yen. The euro (USDEUR) strengthened slightly, rising from $1.0886 to $1.0894.

While the markets continue to navigate shifting interest rate expectations and corporate performances, traders and investors remain vigilant in analyzing these dynamics to make informed decisions.

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