Fed Adrenaline Keeps Pumping, PBOC Inertia May Drag

Market Outlook: Asian Markets Set to Start Strong Following Fed Rate Cut

By Jamie McGeever

The impact of the Federal Reserve’s recent interest rate cut and its commitment to ongoing easing measures continues to energize global financial markets. As the new week begins, risk assets in Asia are expected to open on a positive note.

Futures indicate that Japan’s market will rise by more than 1% at the start, buoyed by a decline in the yen last week. However, a rise in long-term U.S. Treasury yields could temper this optimism.

Recent monetary policy decisions from Japan and China, announced on Friday, may also resonate throughout Asian markets. These signals create a mixed outlook.

The Bank of Japan opted not to change interest rates, indicating a cautious approach towards tightening. This decision contributed to the yen hitting its lowest close since early September, which in turn helped boost Japanese equities.

On the Chinese front, the People’s Bank of China held rates steady, contrary to some expectations. Given China’s sluggish economic indicators and low inflation, there was strong anticipation for rate cuts, especially following the Fed’s significant reduction of 50 basis points. However, the PBOC chose to maintain its stance, even amidst growing evidence suggesting a need for adjustments. Notably, foreign direct investment in China dropped by 31.5% over the first eight months of the year—the largest decline since January 2009.

The yuan has strengthened to its highest level in 16 months, largely due to the PBOC’s cautious approach to rate cuts and increasing speculation about forthcoming stimulus measures aimed at rejuvenating economic growth.

The yen, having had a tumultuous week, starts off tentatively. It initially surged past 140.00 per dollar for the first time in over a year but ultimately closed near 144.00, marking a weekly loss of 2%—its worst performance since April. Japan’s top currency diplomat, Atsushi Mimura, indicated that previous yen carry trades may have been mostly unwound but noted that Tokyo is monitoring any potential resurgence that could lead to increased market volatility.

U.S. futures market data reveals that speculators have grown increasingly optimistic about the yen for the past 11 weeks, with net long positions at an eight-year peak.

The calendar for the Asia and Pacific region on Monday is relatively busy, featuring key data releases including inflation numbers from Malaysia and Singapore, along with flash purchasing managers’ index (PMI) statistics from Australia and India. New Zealand’s trade figures will also be released. Additionally, the Reserve Bank of Australia is set to commence its two-day policy meeting.

Key developments to watch for in Asian markets on Monday include:

• Australia flash PMIs (September)
• India flash PMIs (September)
• Malaysia inflation (August)