Morning Bid: Inauguration caution cools risk-on revival

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets. 

Signs of life being breathed back into China’s economy and a strong rally on Wall Street on Friday bode well for Asian markets on Monday, although nervousness around President-elect Donald Trump’s inauguration could temper the optimism.

U.S. markets will be closed for Martin Luther King Jr. Day, so global liquidity will be lighter than usual, and U.S. debt ceiling jitters are back in sharp focus. Further reason, perhaps, for investors in Asia to tread lightly.

Investors have broadly welcomed the ‘market-friendly’ parts of Trump’s expected agenda like tax cuts and deregulation. But other parts, like tariffs and mass deportations, could rekindle inflation and slow the pace of Fed rate cuts.

Furthermore, higher-for-longer rates could damage growth and stoke ‘stagflation’ concerns, making the Fed’s job even more difficult. His inauguration speech could be laden with market-moving policy pledges, directives and executive orders.

In that context, the saga surrounding TikTok is being closely watched for clues on Trump’s policymaking and approach to China. His latest position is he will revive the China-owned social media app’s access in the U.S. by executive order after he is sworn in, but wants it to be at least half owned by U.S. investors.

Back in the markets, the dollar and Treasury yields eased off Monday’s historic highs and ended last week lower, providing a welcome easing of financial conditions for Asian and emerging markets.

The 10-year yield clocked a 16-month high of 4.80% but fell 17 basis points on the week and the dollar index hit a 27-month high to register only its second weekly loss in 16 weeks.

The catalyst seems to have been relatively tame U.S. inflation data and dovish remarks from Fed Governor Christopher Waller, who floated the idea of three or four quarter-point rate cuts this year.

The S&P 500 rose 3% last week – its best week in 10 – the Nasdaq climbed 2.4% and the MSCI World rose 1.7%. Asian stocks underperformed though – the MSCI Asia ex-Japan index rose 0.8%, Chinese stocks edged up only 0.3%, while Japan’s Nikkei 225 fell.

China’s ‘data dump’ last week was more encouraging than analysts had expected. Overall growth in the fourth quarter was 5.4%, meaning Beijing met its annual GDP growth goal of around 5%.

The People’s Bank of China sets interest rates on Monday. It is expected to ease policy slowly and cautiously in the first quarter of this year, but not necessarily starting on Monday.

Investors in Japan, meanwhile, are gearing up for a possible rate hike from the Bank of Japan on Friday. The latest signals from BOJ officials are pointing firmly in that direction, and markets have reacted accordingly – the yen has rallied, and Japanese stocks have fallen.

Here are key developments that could provide more direction to markets on Monday:

– China interest rate decision

– Japan machinery orders (November)

– Malaysia trade (December)

(Reporting by Jamie McGeever; Editing by Diane Craft)

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