Asian Markets Set to Kick Off 2025 with a Bang
As the first full trading week of 2025 gets underway in Asia, investors are bracing themselves for a tumultuous ride. The spotlight is on China’s currency and bond yields, which have been on a sharp slide, while the political situation in South Korea remains increasingly tense and fluid. Meanwhile, a blocked U.S.-Japanese corporate merger is adding to the uncertainty.
Economic Indicators Take Center Stage
A slew of purchasing managers index (PMI) reports is set to be released, providing investors with a crucial glimpse into how Asia’s biggest economies, including China, fared in the final quarter of 2024. The global market backdrop appears relatively bright, following Friday’s rebound on Wall Street, and equity and bond market volatility seems well-contained. However, emerging market currencies and assets are on the defensive, thanks to elevated U.S. Treasury yields and a surging dollar.
Dollar’s Rise Continues to Dominate
The greenback softened slightly on Friday, but it hit a fresh two-year high the day before, having rallied almost 10% in the last three months. Much of the dollar’s appeal stems from the surge in long-dated U.S. Treasury yields since the Fed began cutting interest rates in September. This remarkable turn of events has left many investors and policymakers scratching their heads.
China’s Economic Outlook Looks Bleak
In stark contrast, China’s economic picture is looking increasingly dire. As investors position themselves for a year of policy easing and liquidity provision from Beijing, the yuan and bond yields are coming under heavy downward pressure. The short end of the Chinese curve is particularly vulnerable, with the two-year yield on the brink of breaking below 1.00%, a record low.
Inflation Data Takes on Greater Significance
Chinese inflation data, set to be released later this week, will take on even greater significance in this context. A Reuters poll suggests annual consumer inflation in December held steady at 0.2%. Although China’s economic surprises index has been rising in recent weeks, markets will be highly sensitive to added deflationary pressures.
Yuan Under Pressure
The spot yuan slid to a four-month low on Friday, breaking through the 7.30 per dollar level that the People’s Bank of China had appeared to be defending. A move through 7.35 per dollar would signal a fresh 17-year low. Selling pressure on the yuan looks strong, as evidenced by the spread between the spot dollar/yuan rate and the central bank’s daily fixing.
Authorities Getting Nervous?
The central bank on Friday warned fund managers against slamming bond yields even lower, amid worries that a bubble in bonds might undercut Beijing’s efforts to revive growth and manage the yuan. Are authorities in Beijing getting nervous?
Key Developments to Watch
Investors will be keeping a close eye on several key developments on Monday, including:
- China, Japan, India, Australia services PMIs (December)
- Thailand inflation (December)
- Vietnam GDP (Q4)
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