Measured Powell and China’s Breather Set the Stage for Q4 Opening, Reports Reuters

Market Overview – By Jamie McGeever

As investors in Asia begin the new quarter on Tuesday, they reflect on a whirlwind conclusion to the third quarter. Recent market shifts saw Chinese stocks achieve their best performance since 2008, while Japanese stocks experienced one of their most significant declines in years.

Fed Chair Jerome Powell’s comments on Monday have tempered some of the more intense expectations regarding future interest rate cuts. He indicated that his baseline outlook is for an additional 50 basis points reduction this year and suggested the central bank would gradually approach its neutral interest rate.

This guidance led to a rise in Treasury bond yields, particularly affecting the short end of the curve, where the two-year yield jumped by 10 basis points. As a result, traders adjusted their predictions for the upcoming Federal Reserve meeting, moving expectations for a November cut closer from 50 basis points down to 25.

Tuesday’s economic agenda is busy, featuring important data releases on Japanese unemployment, Indonesian inflation, South Korean trade, and various purchasing managers index reports from the Asia-Pacific region.

While Powell’s tone was not overtly hawkish, his remarks served as a reminder that some of the rate expectations reflected in the markets may have become overly optimistic.

On Wall Street, markets closed positively on Monday, concluding a robust quarter that saw numerous new highs and a shift in investment focus away from large technology stocks toward undervalued sectors and smaller companies. Asian investors will be closely observing these developments alongside significant market movements in China and Japan.

Chinese markets are on a break until next Tuesday due to the Golden Week celebrations, a pause that comes at an opportune moment. Following an impressive 8% surge, Chinese stocks have increased by about 25% since September 23, when the government introduced initial stimulus measures to bolster the economy and markets. This rapid rise is nothing short of remarkable.

BlackRock, the world’s leading asset manager, has adjusted its tactical asset allocation for China from "neutral" to "modestly overweight."

Despite the stock market’s recent resurgence, uncertainty remains regarding whether these stimulus efforts can effectively rejuvenate the economy. A major challenge lies in the fact that lower borrowing costs and increased market liquidity may not stimulate consumer demand in an economy grappling with a significant property sector downturn, associated deleveraging, and deflationary pressures.

Meanwhile, Japanese stocks will be aiming to recover from nearly a 5% drop on Monday, as investors prepare for elections on October 27. This decline marked the largest fall since the volatility experienced on August 5 and was the third biggest drop since the early days of the pandemic in March 2020. The yen’s depreciation towards 144.00 per dollar could potentially provide some relief.

Key developments to watch for direction in Asian markets on Tuesday include:

• Japan’s unemployment data (August)
• Indonesia’s inflation data (August)
• Purchasing Managers’ Index reports from Australia, India, and other nations (September)