Risk-On Momentum Checks as Northeast Asia Tensions Offset Fed-Driven Optimism

GLOBAL MOOD: Cautious Risk-On
Drivers: Geopolitical tensions rise, Trump pressures the Fed

Asian markets showed a guarded risk-on tone as a softer dollar and Fed easing supported sentiment, but escalating Northeast Asia tensions and uncertainty over the Fed’s next steps curbed conviction. Japanese equities gained on yen weakness, while broader regional appetite stayed restrained.

TODAY’S WATCHLIST

• Fed Balance Sheet
  
• India CPI Inflation Data

THE BIG STORY
The United States conducted a major show of military force on Wednesday, flying two nuclear-capable B-52 bombers alongside Japanese F-35 and F-15 jets over the Sea of Japan. Tokyo said the coordinated flight reaffirmed both nations’ resolve to counter “any unilateral attempt to change the status quo by force,” following a surge in Chinese and Russian military drills near Japan and South Korea. It marked Washington’s first direct display of presence since Beijing launched region-wide exercises last week, underscoring rising tensions in Northeast Asia.

President Donald Trump welcomed the Federal Reserve’s 25 bps rate cut but publicly pushed for more aggressive easing, arguing that borrowing costs remain too high for an economy he says is losing momentum. The Fed, however, signalled it is likely to pause further cuts, citing the need for clearer evidence on labour-market softening, inflation trends, and overall economic resilience. Trump, who has repeatedly criticised Fed Chair Jerome Powell for being insufficiently dovish, is now interviewing candidates to replace him when his term ends in May, a move that is adding political pressure and market uncertainty around the central bank’s policy trajectory heading into 2026.

Data Spotlight 
US labour market data showed renewed softness as initial jobless claims jumped by 44,000 to 236,000 in the week ending 6 December, the largest weekly rise since March 2020 and above expectations of 220,000. The increase followed a holiday-distorted prior week and breaks a four-week streak of declines, with volatility likely to persist through year-end. In contrast, continuing claims fell sharply to 1.838 million, the lowest since April, suggesting some easing in unemployment backlogs.

Separately, the US trade deficit narrowed to $52.8 billion in September, its smallest since June 2020, supported by a 3% surge in exports to $289.3 billion, the second highest on record. Gains were driven by non-monetary gold, pharmaceuticals and financial services, while imports rose modestly by 0.6% amid increases in pharmaceuticals, gold and technology accessories.

Takeaway:The labour data points to a cooling but still resilient job market, distorted by seasonal factors. Meanwhile, the sharp improvement in trade balance signals strong external demand and provides a positive offset to domestic growth concerns heading into year-end.

WHAT HAPPENED OVERNIGHT

• US stocks hit record highs as dovish Fed lifts sentiment
  • S&P 500 and Dow closed at record highs on Thursday after a less hawkish-than-feared Fed update boosted risk appetite.
  • The Nasdaq lagged, weighed down by weakness in AI-linked names following Oracle’s disappointing outlook.
  • Oracle plunged 10.8%, its biggest drop since January, after issuing weaker-than-expected forecasts and warning its annual spending would be $15 billion higher than planned.
  • Broadcom fell 1.6% during the session but rallied 4% after hours as it projected $19.1 billion in quarterly revenue, beating market expectations of $18.27 billion.

• US Treasury yields retreat as Fed reassures on policy path
  • The 10-year US Treasury yield fell ~5 bps to 4.1%, a second straight decline and the lowest in about a week.
  • Chair Powell ruled out rate hikes, calming concerns of any hawkish shift and supporting demand for Treasuries.
  • Yields dropped further after the Fed announced it will begin buying short-dated Treasuries from Dec 12, with an initial $40 billion T-bill purchase to support market liquidity.

• US Dollar sinks to multi-month lows as dovish Fed tone
  • The dollar index slid to 98.35, an eight-week low, after the Fed delivered a less hawkish outlook than markets anticipated.
  • The dollar dropped 0.6% vs the Swiss franc to 0.7947, touching its lowest level since mid-November, supported by the SNB’s decision to hold rates steady.
  • The greenback also weakened against the euro, sterling and yen, extending Wednesday’s losses.
  • Initial jobless claims rose more than expected, reaching a two-month high, reinforcing expectations for two Fed rate cuts in 2026.

• Crude oil prices decline as peace talks and US fuel glut weigh on sentiment
  • Brent crude prices fell 1.49% to $61.28/bbl, pressured by renewed focus on Russia-Ukraine peace negotiations.
  • WTI slipped 1.47% to $57.60/bbl as traders assessed the impact of large surpluses in U.S. gasoline and diesel inventories, signalling weaker near-term demand.
  • Overall, sentiment remained cautious with ample US fuel supplies amplifying concerns about oversupply. 

Day’s Ledger

Economic Data

• Japan Industrial Production 
• India CPI Inflation Data
• India Bank Credit-Deposit Data
• India FX Reserves  

Corporate Actions

• Crest Ventures board to consider fund raising 
• Eros Intl quarterly earnings
• HUDCO board to consider fund raising via NCDs
• Himatsingka board to consider fund raising via NCDs
• IOC board to consider dividend
• JSW Energy board to rights share issue

Policy Events

• Fed Balance Sheet
• Fed Paulson Speech
• Euro ECOFIN Meeting
  

Tickers to Watch

• L&T eyes global nuclear supply chain as demand for clean energy rises
• TCS's AI-first strategy puts spotlight on bold M&A move with Coastal Cloud
• Novo Nordisk challenges HC order permitting Dr Reddy's semaglutide exports
• NHPC invests ₹98,107 cr to build 8,814 MW hydropower capacity by 2032
• Infibeam Avenues to rebrand as AvenuesAI, elevates Vishwas Patel as CEO
• IndiGo announces ₹10,000 travel voucher for 'severely impacted' flyers
• Aster DM Healthcare to invest ₹120 cr in 5 cancer centres for poor patients
• Alembic gets USFDA nod for generic eye infection treatment suspension

Must Read

• Fitch says most Indian firms shielded from rupee swings through hedging
• ECB Unlikely to Follow Fed For Now, But Currency Moves May Yet Prove Decisive
• US Trade Deficit Falls to Five-Year Low
• Developers need new skills, mindset change for AI software systems: Nadella
• Disney invests $1 bn in OpenAI, to license characters for Sora video tool
• Mexico to impose up to 50% tariffs on Indian exports from January 2026
• India's crude oil loadings from Russia dip, but robust in December
• FinMin streamlines recruitment, result timelines for public sector banks

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See you tomorrow with another edition of The Morning Edge.

Have a great trading day

MPC Moves Signal the Arrival of a Post-Cycle Policy Regime 

India’s December policy review may have looked like a routine 25-basis-point cut, but the real story lay elsewhere.  Governor Sanjay Malhotra signalled a deeper shift in the operating framework, one where the repo rate, liquidity and transmission no longer move on a single track.

Kalyan Ram writes, India appears to be moving into a post-cycle regime. Below-target disinflation, structural frictions in growth, and the RBI’s explicit separation of stance from liquidity all point to a framework that demands a new way of reading monetary policy.