Hang Seng Index, Nikkei Fall; ASX Rallies on RBA Rate Cut Optimism

US Markets Slide Amid Shifting Fed Rate Expectations

US equity markets posted losses on Tuesday, January 7, as investors adjusted their expectations for Fed rate cuts. The Nasdaq Composite Index and the S&P 500 reversed their gains from Monday, sliding by 1.89% and 1.11%, respectively, while the Dow fell 0.42%.

In the bond market, 10-year US Treasury yields jumped to 4.685%, the highest level since May 2024, reflecting fading bets on Fed rate cuts. Higher interest rates could elevate borrowing costs, potentially affecting company earnings and valuations.

Losses in crypto-related stocks like MicroStrategy (MSTR) and Marathon Holdings (MARA) weighed on the Nasdaq. Bitcoin (BTC) and the US BTC-spot ETF market reacted to the robust US economic data. Bitcoin ended Tuesday down 5.10%, closing at $97,019.

Economic Data Dampen Rate Cut Expectations

US services sector and labor market data weighed on Fed rate cut bets on Tuesday. The ISM Services PMI rose to 54.1 in December, up from 52.1 in November. Additionally, JOLTS Job Openings jumped from 7.839 million in October to 8.098 million in November.

Accounting for around 80% of the US economy, the pickup in services sector activity could prompt the Fed to maintain higher rates. Additionally, the job openings suggest a resilient US labor market, supporting wage growth. Rising wages could fuel consumer spending and demand-driven inflation, indicating a more hawkish Fed rate path.

The CME FedWatch Tool showed a sharp decline in the probability of rate cuts in January or March, while expectations for steady rates in May rose from 45.5% to 48.5%.

Expectations for a more hawkish Fed rate path affected investor sentiment in Wednesday’s Asian session.

Hang Seng Index Extends Losses

In Asian markets, the Hang Seng Index declined by 1.18% on Wednesday morning, extending Tuesday’s losses. Investors reacted to the overnight US data and the prospects of a more hawkish Fed rate path. Rate-sensitive sectors, including real estate and tech, suffered heavy losses.

The Hang Seng Mainland Properties Index tumbled by 2.20%, while the Hang Seng Tech Index dropped by 1.69%. Tech giants Tencent (0700) and Baidu (9888) saw declines of 2.51% and 1.18%, respectively.

Mainland China-listed stocks joined the broader market in the red. The CSI 300 and Shanghai Composite fell 1.04% and 1.01%, respectively.

Investors continued reacting to Monday’s news of the US Defense Department, including Chinese tech giant Tencent Holdings Limited on the Section 1260H list. The list identifies Chinese companies the US believes work with China’s military. The news coincided with rising concerns about US tariffs on Chinese goods.

Nikkei Dips on Risk Aversion

On Wednesday morning, Japan’s Nikkei Index declined by 0.35%. Risk aversion from falling Fed rate cut bets countered the effects of a weaker Japanese Yen. The USD/JPY climbed to a Wednesday high of 158.238.

A weaker yen supports Japanese exporters by making their goods more competitive and boosting overseas earnings. However, higher borrowing costs could offset the influence of a weaker Yen on earnings.

Sony Corp. (6758) slid by 2.13%, while Nissan Motor Corp (7201) declined by 1.58%.

ASX 200 Advances on RBA Rate Cut Optimism

Meanwhile, Australia’s ASX 200 Index bucked the broader market trend, advancing by 0.74% on Wednesday morning. Aussie inflation figures boosted bets on a February RBA rate cut, driving demand for rate-sensitive stocks. Australia’s underlying annual inflation rate eased from 3.5% in October to 3.2% in November.

Banking, gold, and mining stocks contributed to the gains, while the tech sector capped the upside.

Key movers included the Commonwealth Bank of Australia (CBA), which jumped by 1.64%, with the National Australia Bank (NAB) rallying 1.80%. Lower interest rates may boost demand for credit, supporting earnings.

Bets on a February RBA rate cut also drove demand for capital-intensive mining companies, with BHP Group Ltd. (BHP) and Rio Tinto Ltd. (RIO) posting gains.

Outlook

Asian markets face a pivotal period as global economic and policy factors evolve:

• US-China Relations: Escalating tariffs may weigh on Chinese exports and ripple through regional economies like Australia.
• US Labor Market Data: Continued strength could pressure rate-sensitive sectors.
• China’s Stimulus Measures: Domestic demand support may counter weaker global trade.

With risks from trade tensions and monetary policy shifts persisting, market sentiment remains fragile. Explore how these developments might influence your portfolio here.