By Jamie McGeever
(Reuters) – Here’s what to expect in Asian markets today.
The first full trading week of 2025 begins in Asia on Monday, amidst a notable decline in China’s currency and bond yields, a growingly tense political landscape in South Korea, and a halted corporate merger between U.S. and Japanese firms, all capturing investors’ focus.
Additionally, a series of purchasing managers index (PMI) reports will provide investors with insights into the performance of several major Asian economies, including China, as they wrap up 2024.
Globally, market sentiment appears positive following a rebound on Wall Street on Friday, with equity and bond market volatility remaining relatively stable.
However, emerging market currencies and assets are coming under pressure due to rising U.S. Treasury yields and a strengthening dollar. The dollar dipped slightly on Friday but had recently reached a two-year high and gained nearly 10% over the last three months.
This dollar strength is largely attributed to the increase in long-term U.S. Treasury yields since the Federal Reserve initiated interest rate cuts in September. The central bank has cut rates by 100 basis points, while the 10-year yield has similarly increased by 100 bps, a surprising development for both investors and likely policymakers.
In contrast, the outlook in China is markedly different. As investors prepare for a year of anticipated policy easing and increased liquidity from Beijing, both the yuan and bond yields are facing significant downward pressure.
Attention is particularly on the short end of the Chinese yield curve, with the two-year yield on the verge of dropping below 1.00%. This yield has already reached historical lows, having declined by 50 bps in the last two months and 100 bps since March. The critical 1.00% threshold may be breached on Monday.
In this context, upcoming Chinese inflation data will be of heightened importance. A Reuters poll indicates that annual consumer inflation in December is expected to remain at 0.2%. Despite a rising economic surprises index for China, markets are likely to react sensitively to any added deflationary trends.
The spot yuan dipped to a four-month low on Friday, surpassing the 7.30 per dollar level that the People’s Bank of China seemed to be defending. A further slip past 7.35 per dollar would indicate a new 17-year low.
There is strong selling pressure on the yuan, evident from the widening spread between the spot dollar/yuan exchange rate and the central bank’s daily fixing, which is at its widest level since last July.
Are Beijing’s authorities becoming concerned? The central bank recently admonished fund managers against driving bond yields even lower, as there are concerns that a bond market bubble could undermine efforts to stimulate growth and manage the yuan.
Here are some key developments that may influence markets on Monday:
– PMIs for services in China, Japan, India, and Australia (December)
– Thailand inflation data (December)
– Vietnam GDP (Q4)
