By Jamie McGeever
(Reuters) – A preview of the day ahead in Asian markets from Jamie McGeever.
Optimism and relief are expected to be the dominant emotions among investors on Monday, giving Asian markets a boost as lawmakers in Washington reach an agreement in principle on the US debt ceiling, eliminating the risk of a a catastrophic defect.
Trading and market liquidity in Asia will be lighter than usual, however, with US and UK markets closed for the holidays, opening up the possibility of outsized market movements.
If so, these are likely to be outsized gains, certainly for all risk assets – Wall Street rebounded strongly on Friday, particularly the Nasdaq and tech mega stocks, and the news from Washington this weekend does not will only be considered positive.
After weeks of tough negotiations, Republicans and Democrats have reached a tentative agreement to suspend the $31.4 trillion debt ceiling, which now has to go through the Republican-controlled House of Representatives and led Senate. by Democrats before June 5 to avoid a crippling first-ever default.
Both parties are confident that this will pass.
This could be a double-edged sword for Asian markets, if not Monday than in the days and weeks ahead. A debt limit deal gives the Federal Reserve more leeway to tighten policy, which could push up US bond yields and strengthen the dollar — not generally a good combination for emerging markets.
The dollar is already on a tear, hitting a two-month high on an index basis last week and six-month highs against the Japanese yen and Chinese yuan above 140 yen and 7.00 yuan, respectively. . Japanese and Chinese policymakers, however, face different challenges.
Inflation in Japan is high and sticky, and the Bank of Japan is under pressure to modify or abandon its ultra-accommodative “yield curve control” monetary policy. Tokyo might quietly prefer the yen to strengthen from here.
Beijing, on the other hand, might want the yuan to fall further. The recovery of the economy from the lockdown has been weaker than expected, to put it mildly, and inflationary pressures are evaporating. Barclays economists predict 10 to 20 basis points cut in policy rates and 25 to 50 basis points cut in the reserve requirement ratio over the next six to nine months.
Japanese stock markets opened Monday near 33-year highs hit last week, while Chinese stocks languish near six-month lows. The same goes for the Hang Seng tech index, which is struggling under the cloud of growing trade tensions between the US and China rather than benefiting from the US tech boom.
Maybe that will change on Monday, if only briefly.
The Asian economic data and events calendar is light on Monday but picks up later in the week, with the focus on Japanese unemployment on Tuesday, India’s Q1 GDP and interest rate decision from Thailand on Wednesday, and first-quarter GDP from South Korea on Friday.
PMI reports from several countries are also expected to be released, with May data from China on Tuesday and Wednesday likely to be key market drivers.
Here are three key developments that could give markets more direction on Monday:
– Market reaction to US debt limitation agreement
– Follow-up reaction to the Nasdaq rally
– Thin trading terms due to US and UK public holidays
(By Jamie McGeever; Editing by Diane Craft)