Dollar strong ahead of Fed meeting, Japan auto shares surge on Honda-Nissan news
Dollar hits 2-yr high vs NZD, 1-yr peak vs AUD
Automakers surge in Japan on news of Honda-Nissan talks
Gilt-bund spread widest since 1990
By Tom Westbrook
SINGAPORE, Dec 18 (Reuters) -Asian stocks hovered near two-week lows and the dollar hit milestone highs against the Australian and New Zealand dollars on Wednesday in the countdown to an expected U.S. interest rate cut.
In Japan, auto shares leapt on hopes that talks between Honda and Nissan heralded industry consolidation.
The S&P 500 .SPX edged 0.4% lower overnight but MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5% in early trade .MIAPJ0000PUS.
Japan's Nikkei .N225 was 0.3% lower but a record 22% jump in Nissan shares 7201.T led gains in the sector as investors cheered the prospect of consolidation bringing down costs. Shares in Honda, whose market cap is five times larger than embattled Nissan, fell 1.6%.
Honda 7267.T and Nissan - Japan's second and third-biggest automakers, behind Toyota 7203.T - are in talks to set up a holding company, according to a person with knowledge of the matter, a move that would allow them to share more resources.
The companies said no merger had been announced but investors cheered the prospect of closer ties as margins have come under intense pressure from Chinese electric vehicles.
Mitsubishi Motors 7211.T jumped 14% while Mazda 7261.T gained 4%.
Later in the day the Federal Reserve is expected to move the Fed funds rate window 25 basis points lower - from its current 4.5-4.75% range - but to offer a cautious outlook and probably lift its long-run interest rate projections. 0#USDIRPR0#FF:
Markets expect only about 50 basis points of further U.S. easing in 2025, leaving rates around 3.8%. That is much higher than Fed members' median projection for rates at 3.4% at the end of next year and for a long-run neutral rate of 2.9%, which is driving speculation the Fed may move to meet the market.
"The market reaction is likely to focus on the communication and potential guidance for further cuts," said David Doyle, head of economics at Macquarie.
"We foresee a hawkish shift in the dot plot, consistent with the movement in market expectations since the last update in September."
Traders have been driving up U.S. yields and the dollar, with benchmark 10-year yields US10YT=RR touching one-month highs around 4.4% overnight, before settling at 4.39%.
Moves in the Asia session were small but reflected the dollar's broad strength, with the Australian dollar AUD=D3 edging to a one-year low on the U.S. dollar at $0.6325 and the New Zealand dollar NZD=D3 at a two-year low of $0.5748.AUD/
The euro EUR=EBS was under pressure at $1.0502 and the yen JPY=EBS dipped slightly to 153.6 per dollar. FRX/
HIGHER FOR LONGER
Bond markets, especially outside Europe, also seem to be girding for a higher interest rate future.
Pricing in Japan implies a 20% chance of a rate hike on Thursday - but that higher rates are a matter of time with more than 40 bps of hikes priced in by the end of 2025. 0#JPYIRPR
An unexpectedly big surge in British wages drove a wave of selling in gilts, a reduction in expectations for rate cuts and a lift for sterling GBP=D3, which at $1.2710 is flat for the year and the best performing G10 currency against the dollar.
Sterling is also within range of post-Brexit highs on the euro EURGBP= and the gap between 10-year gilt yields over German bund yields DE10GB10=RR is its widest since 1990 and wider than the gap between U.S. rates and bunds DE10US10=RR.
"Given the political and growth woes of the Eurozone, we don't expect sterling to weaken much against the euro," said Kit Juckes, strategist at Societe Generale, though he doesn't see the euro falling dramatically on the cross either.
In energy markets, European gas prices TRNLTTFMc1 rebounded overnight on renewed concern about Russian supply via Ukraine, as a transit agreement expires at the end of the year.
Weak economies in Germany and China weighed on oil prices, keeping Brent crude futures LCOc1 at $73.34 a barrel.
The rise in yields has kept a lid on gold XAU= which was trading at $2,650 an ounce. Bitcoin BTC= hovered just below record highs at $105,393.
World FX rates YTD http://tmsnrt.rs/2egbfVh
Asian stock markets https://tmsnrt.rs/2zpUAr4
Reporting by Tom Westbrook; Editing by Edwina Gibbs
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
