Written by Jamie MacGyver
(Reuters) – A look at the day ahead in Asian markets.
The first full trading week of 2025 kicks off in Asia on Monday with a sharp decline in Chinese currency and bond yields, an increasingly tense and volatile political situation in South Korea, and a blocked US-Japanese corporate merger all vying for investors’ attention.
There is also a host of PMI reports, giving investors their first glimpse at how many of Asia’s largest economies, including China, have closed for 2024.
The global market backdrop looks relatively bright after Wall Street’s rebound on Friday, and stock and bond market volatility appears to be well contained.
But emerging market currencies and assets are on the defensive, thanks to rising US Treasury yields and a stronger dollar. The US currency fell slightly on Friday, but reached a new two-year high the day before and has risen nearly 10% in the past three months.
Much of the dollar’s appeal comes from the rise in long-term US Treasury yields since the Federal Reserve began cutting interest rates in September. The central bank’s 100 basis point easing program was met with a 100 basis point rise in the 10-year bond yield, a remarkable turn of events that fooled most investors – and potential policymakers as well.
The picture in China could not be more different. As investors brace for a year of policy easing and liquidity provision from Beijing, the yuan and bond yields are under intense downward pressure.
Attention is focused on the short end of the Chinese curve, with the two-year bond yield on the verge of breaking below 1.00%. It is already the lowest level on record, having fallen by 50 basis points in the past two months and 100 basis points since last March. The 1.00% psychological barrier may be broken on Monday.
In this context, Chinese inflation data later this week will gain greater importance, and a Reuters poll indicates that the annual consumer inflation rate in December remained steady at 0.2%. Although China’s economic surprises index has risen in recent weeks, markets will be very sensitive to additional deflationary pressures.
The spot yuan fell on Friday to its lowest level in four months, breaching the 7.30 level to the dollar that the People’s Bank of China appeared to be defending. A move through 7.35 per dollar would signal a new 17-year low.
The selling pressure on the yuan appears to be very strong, as evidenced by the spread between the spot dollar/yuan rate and the central bank’s daily fixing. It is now the widest since last July, and hovering around its widest levels ever.
Are the authorities in Beijing feeling nervous? The central bank on Friday warned fund managers against cutting bond yields to lower levels, amid concerns that a bond bubble would undermine Beijing’s efforts to revive growth and manage the yuan.
Here are the key developments that could provide further guidance to markets on Monday:
– Services PMIs for China, Japan, India and Australia (December)
– Inflation in Thailand (December)
– Vietnam’s GDP (4th quarter)
(Reporting by Jamie McGeever, Editing by Diane Craft)