Hang Seng Index and Nikkei 225: Fed’s Hawkish Tone Fuels Market Selloff

Fed’s Hawkish Tone Rattles Global Markets: What’s Next?

Here’s how US equity markets performed on Wednesday, December 18.

US equity markets fell sharply on Wednesday as investors reacted to the FOMC Economic Projections and press conference. The Nasdaq Composite Index dived 3.56%, with the S&P 500 tumbling 2.95%. Meanwhile, the Dow extended its losing streak to ten sessions, sliding by 2.58%.

In the bond markets, 10-year US Treasury yields surged to 4.506%, the highest level since May 31, as the Fed signaled a pause on further rate cuts.

Fed Delivers a ‘Hawkish’ Interest Rate Cut

On Wednesday, the Fed lowered interest rates by 25 basis points to 4.25% – 4.50% as widely expected. However, the FOMC Economic Projections signaled a less dovish 2025 Fed rate path, rattling markets.

The Fed upped its growth and inflation forecasts while lowering its unemployment outlook. Notably, the Fed raised its 2025 Fed Funds Rate projection to 3.9%, up from September’s 3.4%, dampening risk sentiment.

According to the CME FedWatch Tool, the probability of a 25-basis-point January Fed rate cut dropped from 16.8% on December 17 to 6.4% on December 18.

Bank of Japan Steadies Policy Amid Yen Pressure

On Thursday, December 19, the Bank of Japan kept rates steady at 0.25%. The policy hold leaves Bank of Japan Governor Kazuo Ueda to offer clues about the timing of a rate hike.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented on the BoJ’s move away from a December rate hike ahead of the announcement, stating,

“Continued inflation-wage virtuous circle should have supported a hike but politics getting in the way. […] All in all, the virtuous circle between inflation and wages has made further progress recently clearing the way for a hike but the BoJ does not seem so ready to go ahead, at least not just now. The Fed’s hawkish tone yesterday could make a pause more risky in terms of a further depreciation of the Yen.”

Hang Seng Index Retreats Amid Fed Fallout

In Asian markets, the Hang Seng Index declined by 0.80% on Thursday morning as investors reacted to the Fed’s cut-and-hold maneuver. However, the losses were modest relative to the broader markets as Beijing’s stimulus pledges limited the downside.

Real estate and tech stocks dropped on the prospect of a higher-for-longer Fed rate path. The Hang Seng Mainland Properties Index fell by 0.93%, while the Hang Seng TECH Index slid by 1.03%. Tech giants Baidu (9888) and Alibaba (9988) were down 1.82% and 1.96%, respectively.

Mainland China markets also trended lower amid risk aversion, with the CSI 300 and the Shanghai Composite declining by 0.72% and 0.72%, respectively.

Nikkei Index

Japan’s Nikkei Index declined by 0.74% in a choppy Thursday morning session. The USD/JPY advanced by 0.85% on Wednesday, supporting demand for Nikkei Index-listed export stocks. However, the Fed’s hawkish stance dragged tech stocks lower, overshadowing the BoJ’s hold.

Tokyo Electron (8035) and Softbank Group (9984) tumbled by 1.39% and 4.16%, respectively.

ASX 200 Tracks the US Markets into the Deep Red

Meanwhile, Australia’s ASX 200 Index tumbled by 1.97% on Thursday morning, mirroring the overnight losses in the US. Losses were broad-based as investors reacted to the Fed’s hawkish rate cut. The S&P/ASX All Technology Index reflected the Fed’s rate path outlook, sliding by 2.76%.

Gold stock Northern Star Resources (NST) slumped by 3.66% after gold dropped by 2.30% to $2,585 on Wednesday. Rising US Treasury yields also weighed on demand for high-yielding Aussie banks. Commonwealth Bank of Australia (CBA) and ANZ (ANZ) posted losses of 2.54% and 2.72%, respectively.

Outlook: Economic Data in Focus

Market volatility is likely to persist as investors weigh the Fed and BoJ policy outcomes. Key data releases, including Japan’s inflation figures and the US Personal Income and Outlays Report on Friday, December 20, could provide further direction.

Additionally, Beijing’s stimulus measures and US tariff threats remain critical factors. Traders should monitor global economic trends and trade developments to navigate the shifting landscape.

For expert insights and detailed analysis of the Hang Seng Index and global markets, click here.