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Global equity markets may face challenges in gaining ground early this week as the possibility of early interest rate cuts diminished in light of persistent inflationary pressures. While seasonal factors likely contributed to the inflationary trends, the uncertain state of the US economy has left macro traders in a cautious stance. With a relatively quiet week in terms of economic data, investors may find limited guidance in this regard.
However, market participants will closely monitor statements from Federal Reserve officials, particularly in light of the recent overshoot in services inflation. This development may raise concerns within the Federal Reserve, especially considering Jerome Powell’s apprehensions that services may not carry the baton once the disinflation effect of falling goods prices dissipates.
Asia-Pacific markets opened mixed Tuesday as investors await an update on its key lending rates from China’s central bank.
As trading activity resumes in Asia on Tuesday and liquidity returns to normal post-US Presidents Day, investors will focus on whether Chinese markets can sustain their gradual recovery from recent lows and if Japan’s stocks can reach levels not seen in over 30 years.
The return of Chinese markets after the Lunar New Year break will be closely watched to gauge sentiment and investor appetite, especially amid ongoing concerns about the property and stock market slump.
However, despite the solid official data indicating robust travel and spending during the Lunar New Year festivities, mainland Chinese equities did not experience significant gains when trading resumed after the holiday. Analysts were not swayed by what some Wall Street banks described as mediocre data, as they observed that tourist receipts declined by double digits compared to 2019 per capita. This suggests that investor sentiment is still affected by the prolonged property and stock market slump.
The 1.2% gain in equities reportedly required ETF-buying by state funds late in the session, indicating intervention was required to support the market. Turnover in certain products, including funds tracking mid-sized and small firms associated with Beijing’s support efforts, was notably high, a hallmark for recent state-supported rallies. At the same time, foreign investors were net sellers to the significant tune of 835 million real dollars.
Many Asian countries struggle under tight financial conditions, especially those relying on US dollar-denominated funding. However, in Japan, financial conditions remain ultra-loose thanks to negative interest rates, booming stock markets, and a weaker JPY, where the dramatic wealth effect could stir inflation concerns in the halls of the Bank of Japan.
Indeed, last week, Goldman Sachs’ Japanese financial conditions index sank to a 34-year low. This underscores the sliding yen/booming stock market nexus and would appear to be inflationary. Could this be a catalyst to tip the scales for the Bank Of Japan to abandon yield curve Control, at a minimum?
The upcoming 20-year bond auction in Japan on Tuesday is expected to attract heightened attention, particularly following the unexpected surge in demand witnessed from pension funds during a recent 10-year sale. This increased interest reflects a potential shift in sentiment among investors regarding longer-term Japanese government bonds.
Moreover, Monday’s auction of 12-month bills marked a significant development, with the first positive yield at auction since October 2014. This outcome signals a notable change in the prevailing market dynamics and underscores the evolving investor sentiment towards shorter-term Japanese government securities.
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