Author: Jamie McGeever
(Reuters) – A look at the day ahead in Asian markets.
The first full trading week of 2025 opens in Asia on Monday with sharp falls in Chinese currency and bond yields, an increasingly tense and fluid political situation in South Korea and a blocked US-Japan corporate merger vying for investors’ attention.
A raft of PMI reports are also on deck, offering investors a first look at how many of Asia’s largest economies, including China’s, have ended 2024.
The global market backdrop looks relatively bright after Wall Street’s recovery on Friday, with stock and bond market volatility appearing well under control.
But emerging market currencies and assets are on the defensive, thanks to higher US Treasury yields and a surging dollar. The dollar softened slightly on Friday, but hit a new two-year high the day before and has gained nearly 10% over the past three months.
Much of the dollar’s appeal has come from the rise in long-dated U.S. Treasury yields since the Fed began cutting interest rates in September. 100 basis points of central bank easing was met with a 100 bps rise in the 10-year yield, a remarkable turn of events that baffled most investors – and probably policymakers as well.
The picture in China cannot be different. As investors brace for a year of policy easing and liquidity provision from Beijing, the yuan and bond yields are under heavy downward pressure.
Attention is focused on the short end of China’s curve, with the two-year yield on the verge of breaking below 1.00%. That’s already the lowest on record, down 50 bps in the past two months and 100 bps since last March. The psychological barrier of 1.00% could be broken on Monday.
Against this backdrop, China’s inflation data later this week will take on even greater significance, with a Reuters poll showing annual consumer inflation held steady at 0.2% in December. Although China’s economic surprises index has been rising in recent weeks, markets will be highly sensitive to additional deflationary pressures.
The spot yuan fell to a four-month low on Friday, breaking the 7.30 level to the dollar that the People’s Bank of China appeared to be defending. A move above 7.35 per dollar would signal a new 17-year low.
Selling pressure on the yuan looks quite strong, as evidenced by the difference between the dollar/yuan spot rate and the central bank’s daily fix. It is now the widest since last July, hovering around the widest levels on record.
Are the authorities in Beijing nervous? The central bank warned fund managers on Friday not to push bond yields further lower, amid concerns that a bond bubble could undermine Beijing’s efforts to revive growth and manage the yuan.
Here are the key developments that could provide more direction to markets on Monday:
– PMI for services of China, Japan, India, Australia (December)
– Inflation in Thailand (December)
– GDP of Vietnam (Q4)
