Asian stocks are poised to break free from a two-year losing streak as investors express optimism about the possibility of the Federal Reserve implementing interest rate cuts in 2024. The last trading day of the year saw Asian markets taking a breather, with MSCI’s broadest index of Asia-Pacific shares outside Japan holding steady near a five-month peak, on track for a 5% gain for the year after enduring heavy losses in the past two years.

Investors have been increasingly buoyed by the expectation that central banks, particularly the Federal Reserve, may shift towards a more accommodative stance. MSCI’s index has surged more than 11% in the last two months, reflecting growing confidence that central banks are done raising interest rates and are gearing up for easing measures.

According to the CME FedWatch tool, markets are currently pricing in an 88% chance of the Federal Reserve initiating rate cuts in March 2024, a significant jump from the 35% probability at the end of November. Traders are also factoring in over 150 basis points of easing throughout 2024.

The surge in investor confidence is rooted in a slew of robust US economic data that underscores the strength of the economy and signals a potential shift in the Federal Reserve’s stance. However, experts warn of potential disappointment in 2024, emphasizing that rate cuts are likely to be measured and gradual.

“Goldilocks bets on soft-landing hopes, emboldened by US exceptionalism and aggressive rate cut bets inspired by emphatic disinflation, risk being wrong-footed,” commented Vishnu Varathan, head of economics and strategy at Mizuho Bank.

In the realm of Asian markets, Japan’s Nikkei emerged as the best-performing major stock market in 2023, boasting a remarkable gain of 28%, its strongest yearly performance in a decade. Taiwan’s stock market closely followed with a 26.6% rise, while India’s Nifty secured the third spot with a 20% increase.

Conversely, Thailand’s SET index claimed the title of the worst-performing stock market in Asia for 2023, experiencing a decline of 15%. Hong Kong’s Hang Seng index followed closely with a 14% decline, making it the second weakest performer. China’s blue-chip stocks were on course for an 11% decline for the year.

Looking beyond Asia, futures suggest that European bourses are likely to experience a subdued end to the year as traders consolidate their positions. The pan-European Stoxx 600 recorded an impressive 11% increase in the past two months, hovering around its 23-month peak.

In the global bonds market, the rally continues, pushing yields lower. The 10-year US Treasury yield touched its lowest level since July 19, reaching 3.8387%, as the market reacts to the prospect of rate cuts.

Meanwhile, in the currency market, the US dollar remains on the back foot, set to conclude the year with a 2% decline after two years of robust gains driven by rate hikes to combat inflation. The dollar index, measuring its value against a basket of currencies, is currently at 101.50, moving away from the five-month low of 100.61 observed earlier in the week.

While the weakness in the dollar is expected to persist, especially if the Federal Reserve implements rate cuts in early 2024, the robustness of the US economy could potentially limit its decline in the coming months.