Asian stocks dip amid inflation angst; Nikkei surges on dovish BOJ bets

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Asian stocks dip amid inflation angst; Nikkei surges on dovish BOJ bets Most Asian stocks retreated on Wednesday as investors remained on edge over U.S. inflation and early interest rate cuts, while Japan’s Nikkei 225 jumped to a 34-year high amid growing expectations of a delay in the Bank of Japan’s plans to tighten policy.

Regional stocks took a weak lead-in from Wall Street, as U.S. stock indexes clocked a muted close amid persistent uncertainty over early interest rate cuts by the Federal Reserve.

Asian stocks had seen some strength on Tuesday as losses in the first week of 2024 drove some bargain buying, particularly in the technology sector. But barring Japanese stocks, traders remained largely averse to risk-driven assets ahead of more cues on U.S. monetary policy.

Nikkei 225 hits 34-year high as BOJ pivot bets fade

Japan’s Nikkei 225 was a key outlier among global stock markets, surging nearly 2% on Wednesday to its highest level since the before the burst of a major speculative bubble in the 1990s.

The Nikkei’s biggest point of support was growing bets that the BOJ will have to delay its plans to begin tightening its ultra-dovish policy in 2024, especially after a devastating earthquake in central Japan.

Rebuilding and fiscal stimulus efforts in the wake of the disaster are expected to largely offset any notion of tighter policy from the BOJ, which bodes well for Japanese stocks.

The Nikkei was the best-performing major stock index in 2023 with a 30% gain, helped chiefly by a dovish BOJ as the central bank maintained its stimulative policies even as most of its peers began raising interest rates.

Weak inflation and wage growth data also pointed to less pressure on the BOJ to begin tightening policy.

Still, the Nikkei remained vulnerable to profit-taking at recent highs. The upcoming fourth quarter earnings season will also test whether Japanese stocks are able to justify their frothy valuations.

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Broader Asian markets fell as traders steadily curbed expectations that the Fed will cut interest rates by as early as March 2024. Markets were on edge before key U.S. consumer price index (CPI) data on Friday, which is expected to show a mild pick-up in inflation in December.

Sticky inflation, coupled with recent signs of strength in the labor market , are expected to give the Fed enough headroom to keep rates higher for longer. This scenario bodes poorly for risk-driven stock markets.

Sticky inflation readings also weighed on some Asian markets. Australia’s ASX 200 fell 0.6% as data showed inflation fell slightly more than expected in November, but remained comfortably above the Reserve Bank’s annual 2% to 3% target.

China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indexes fell 0.1% each, and hovered around multi-year lows as sentiment towards the country remained weak. Losses in mainland stocks also drove Hong Kong’s Hang Seng index down 0.6%.

Focus this week is also on Chinese inflation and trade data, which is expected to show little improvement in the world’s second-largest economy.

South Korea’s KOSPI fell 0.7% before a Bank of Korea meeting on Thursday, where the central bank is expected to keep rates on hold.

Futures for India’s Nifty 50 index pointed to a weak open, with the index set to fall in line with its Asian peers. Indian CPI inflation data is also on tap this week.

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