Asian markets are expected to remain cautious following mixed Chinese economic data and political instability in major developed economies. Investors are anticipating key interest rate decisions from several G10 central banks later this week.
Recent political events, including the resignation of Canada’s finance minister, a vote of no confidence in Germany’s Chancellor, and a surprise credit rating downgrade for France, have contributed to a risk-off sentiment. While these events don’t directly impact emerging markets, they could prompt investors to reduce risk exposure ahead of central bank policy announcements.
In contrast to the cautious mood, the U.S. dollar and bond yields remained relatively stable, while U.S. stocks rallied on Monday, with the Nasdaq hitting its 36th record high this year. This optimism stems from expectations of a Federal Reserve rate cut on Wednesday.
The Japanese yen weakened for the sixth consecutive day, reaching a one-month low against the dollar. Traders are less confident about a potential rate hike from the Bank of Japan (BOJ) this week or even in January.
While recent strong economic indicators and national wage growth settlements in Japan could support a sooner-than-expected BOJ rate hike, other factors suggest a more cautious approach. Japan’s economic surprises index recently hit a two-and-a-half-year low. Furthermore, escalating U.S.-China trade tensions and the potential for a significant depreciation of the Chinese yuan could influence the BOJ’s decision.
A recent Reuters poll indicates a shift in expectations, with a slim majority of economists now predicting the BOJ will maintain its current borrowing costs this week, contrasting with last month’s poll favoring a rate hike.
Elsewhere, the South Korean won continued its decline as the Constitutional Court began reviewing the impeachment of President Yoon Suk Yeol. The outcome will determine his future in office, while investigators plan to question him on criminal charges this week. The won is nearing its two-year low and could weaken further if it breaches the 1445 per dollar mark.
Sentiment towards Chinese assets remains uncertain. Recent data revealed foreign institutions reduced their holdings in Chinese onshore bonds for the third consecutive month, reflecting outflows from both Chinese bond and equity markets in November.
Several key economic releases on Tuesday could further influence market direction:
- Hong Kong unemployment data (November)
- Singapore trade data (November)
- Germany’s Ifo and ZEW surveys (December)
These data points, alongside ongoing political and economic developments, will be closely monitored by investors as they navigate the current market landscape. The upcoming central bank decisions will undoubtedly play a crucial role in shaping market sentiment in the coming days.
