By Jamie McGeever
(Reuters) – A look at what lies ahead for Asian markets.
Signs of life breathing back into China’s economy and a strong rebound on Wall Street on Friday bode well for Asian markets on Monday, although jitters surrounding President-elect Donald Trump’s inauguration could temper optimism.
US markets will be closed for Martin Luther King Jr. Day, so global liquidity will be lower than usual and jitters over the US debt ceiling are back in the spotlight. There may be yet another reason for investors in Asia to exercise caution.
Investors have generally welcomed the “market-friendly” parts of Trump’s expected agenda, such as tax cuts and deregulation. But other parts, such as tariffs and mass deportations, could reignite inflation and slow the pace of the Federal Reserve’s rate cuts.
Additionally, higher rates for longer could hurt growth and stoke concerns about “stagflation,” making the Fed’s job even more difficult. His inaugural speech could be loaded with promises of market-moving policies, directives and executive orders.
In that context, the saga surrounding TikTok is being closely watched for clues about Trump’s policymaking and approach to China. His latest position is that he will revive the Chinese-owned social media app’s access in the U.S. by executive order after he is sworn in, but he wants at least half to be owned by American investors.
Back in the markets, dollar and Treasury yields retreated from Monday’s all-time highs and ended last week lower, providing a welcome easing of financial conditions for Asian and emerging markets.
The 10-year yield hit a 16-month high of 4.80%, but fell 17 basis points for the week and the dollar index hit a 27-month high to post only its second weekly loss in 16 weeks.
The catalyst appears to have been relatively subdued U.S. inflation data and dovish comments from Federal Reserve Governor Christopher Waller, who floated the idea of three- or four-quarter-point rate cuts this year.
The S&P 500 rose 3% last week – its best week in 10 – the Nasdaq rose 2.4% and the MSCI World rose 1.7%. However, Asian stocks underperformed: the MSCI Asia ex-Japan index rose 0.8%, Chinese stocks rose just 0.3%, while Japan’s Nikkei 225 fell.
China’s “data dump” last week was more encouraging than analysts expected. Overall growth in the fourth quarter was 5.4%, meaning Beijing met its annual GDP growth target of around 5%.
The People’s Bank of China sets interest rates on Monday. It is expected to ease policy slowly and cautiously in the first quarter of this year, but not necessarily starting Monday.