By Jamie McGeever
(Reuters) – A look at the day ahead in Asian markets.
Asian markets on Monday will have their first opportunity to react to Friday’s extraordinary market moves, which saw stock and bond yields fall, and volatility and rate cut expectations soar following an unexpectedly weak report. on employment in the USA.
This “no risk” sentiment and dynamic will certainly resonate in Asia, which was already wavering last week following the Bank of Japan’s aggressive policy tilt, even slower Chinese economic data and some weak gains in the US technology sector. .
The MSCI Asia ex-Japan stock index fell 2.5% on Friday, its biggest drop in more than two years, and Japan’s Nikkei 225 index sank 5.8%, its biggest drop since March 2020. Japan’s broader Topix 6.1% drop marked its worst day since 2016.
Given Friday’s sell-off fueled by US payrolls on Wall Street, a sharp sell-off in Asia is likely on Monday morning. Friday’s market swings may be excessive, but they are worth noting.
The two-year US Treasury yield fell 30 basis points, the sharpest one-day drop since the US regional banking shock in March last year. Its weekly drop of 50 basis points is in line with those seen in the COVID-19, Lehman, 9/11 and Black Monday crises.
In stocks, the VIX volatility index at one point on Friday doubled compared to the previous day.
The stampede to ease carry trades helped push the yen up nearly 5% against the dollar last week – the Japanese currency has only had three better weeks in the last 25 years.
Falling US bond yields may ease financial conditions – Goldman Sachs’ Emerging Markets Financial Conditions Index fell to its lowest level since March on Friday – but they are easing for “bad” reasons, namely fears of recession.
Hopes of a much-touted US economic “soft landing” appear to have completely evaporated, being replaced by fears of a “hard landing”.
Investors are now giving a 70% chance that the Fed will cut rates by half a percentage point next month, and are betting on 115 basis points of easing by the end of the year and more than 200 basis points by next June.
It will be worth watching the high-yield corporate debt markets closely. This is where the first signs of a “credit event” typically appear, heralding a broader retrenchment in businesses, a rise in unemployment and, ultimately, a recession.
Spreads on U.S. high-yield debt over Treasuries jumped to their highest level of the year on Friday by more than 370 basis points, but that was mainly due to falling government bond yields, not to investors who exited corporate debt. If this dynamic changes, hold on.
Monday’s Asian economic and events calendar includes service sector purchasing managers’ index data from across the continent, including China, inflation numbers from Thailand, GDP numbers from Indonesia and some Japanese earnings.
Here are key developments that could provide further guidance to markets on Monday:
– China ‘Unofficial’ Services PMI (July)
– Consumer price inflation in Thailand (July)
– Indonesian GDP (2nd quarter)
(Reporting by Jamie McGeever; Editing by Diane Craft)
