Asian shares hit five-month highs on Thursday as investors continued to bet on increasingly aggressive rate cuts, extending a substantial rally in US stocks and bonds. The optimism, however, raises concerns about potential disappointments in the upcoming new year.

The S&P 500 has surged 14 per cent in the past two months, nearing its all-time closing peak, and its price-to-earnings ratio has risen by a quarter to 24.0. MSCI's broadest index of Asia-Pacific shares, excluding Japan, added another 1.4 per cent, marking an 11 per cent gain over two months and reaching its highest level since August.

Japan's Nikkei was down 0.4 on the back of rebound in the yen that limited gains for December. Chinese blue chips bounced 2.3 per cent, showing resilience despite concerns about the economy's recovery and US-China tensions.

European futures, including EUROSTOXX 50 and FTSE, showed positive signs. S&P 500 and Nasdaq futures in the US edged higher, with S&P 500 futures reaching another record high.

Investors are anticipating rapid-fire rate cuts from the Federal Reserve, with futures implying an 88 per cent chance of a rate cut as early as March. This represents a significant shift from just a month ago when the probability was only 21 per cent. The market has already priced in about 157 basis points of easing for 2024.

Yields on 10-year Treasury notes hit a five-month low, contributing to a weaker US dollar.

The euro rose to its highest level since July at $1.1129, while sterling reached a five-month top of $1.2812.

The Bank of Japan (BOJ) Governor Kazuo Ueda indicated a cautious approach to unwinding loose policies, stressing on the minimal risk of inflation exceeding 2 per cent.

Gold prices climbed to $2,086 an ounce, following an all-time closing high on Wednesday.

Oil prices were subdued as concerns over supplies eased, with Brent edging up to $79.75 a barrel and US crude falling to $74.08 per barrel.

While the market remains optimistic about aggressive rate cuts and continues to reach new highs, there are growing concerns about potential setbacks in the new year. Investors are closely monitoring central bank strategies, currency movements, and commodity prices for further market cues. 

(With Reuters inputs)