Bracing for a Major Selloff – Reuters

By Jamie McGeever

Asian markets are poised for a significant decline as trading begins on Monday, following a sharp drop on Wall Street last Friday. Investors reacted to U.S. employment data and remarks from Federal Reserve officials, perceiving a ‘worst of both worlds’ scenario—evidence of labor market weakness without a substantial inclination to reduce interest rates by 50 basis points in the upcoming meeting.

Japanese futures suggest an opening decrease of over 3%, influenced by the strengthened yen, which reflects the prevailing risk aversion in global markets. On the previous Friday, substantial losses in major U.S. indices marked the most considerable weekly decline since March 2023 for both the S&P 500 and the Dow, while the Nasdaq suffered its largest weekly drop since January 2022, falling by 2.6%.

As concerns around the U.S. economic outlook escalate, Asia’s economic calendar is brimming with critical indicators from China, Japan, and Taiwan that could have far-reaching implications. Japan is set to release data on bank lending, trade, current account balances, and revised GDP growth figures. Meanwhile, Taiwan will disclose its trade statistics, and notably, China will report on producer and consumer price inflation.

International investors are becoming increasingly cautious regarding Asian equities. Recent data indicates that they were net sellers in August, and JP Morgan has recently retracted its buy recommendation on Chinese stocks, which closed at a seven-month low on Friday.

The signals from the U.S. on Friday may have been more complex than the markets’ negative reactions might reflect. The unemployment rate decreased, wage growth picked up, and officials reiterated their belief in a potential ‘soft landing’ for the economy. Fed Governor Christopher Waller and New York Fed President John Williams indicated that cuts to interest rates may be necessary. However, neither suggested that a 50 basis point reduction is imminent.

In commodity markets, oil and other prices have been declining sharply, further indicating investors’ growing concerns about the global economic outlook. Upcoming data from Asia on Monday is expected to provide additional insights into this situation.

In China, consumer inflation is projected to rise to 0.7% in August from 0.5% in July, which would signal progress; however, the battle against deflation is far from over, with expectations that factory gate prices will reflect a year-on-year decline of 1.4% in August, nearly double the decrease observed in July.

Former central bank governor Yi Gang has called for more aggressive measures against deflationary pressures, advocating for increased fiscal stimulus and more accommodating monetary policies.

Japan’s second-quarter GDP growth estimate is anticipated to be slightly revised upward, while Taiwan’s export growth is expected to exceed previous figures, predicted to soar to 7.35% in August—significant considering Taiwan’s TSMC is the premier global contract chipmaker and a partner of Nvidia in chip manufacturing.

Key developments to watch on Monday include:

• China’s Producer Price Index and Consumer Price Index inflation figures for August
• Revised GDP figures for Japan’s second quarter
• Taiwan’s trade data for August