Taking chips off the table, seeking China clarity

Investors go into Wednesday in a cautious frame of mind as they continue to digest the likely impact of China’s policy signal this week, and following a ‘risk off’ day that saw stocks fall and the dollar and bond yields rise.

Asia’s economic calendar on Wednesday is light, with only Japanese producer inflation and South Korean unemployment figures on tap. Reserve Bank of Australia Deputy Governor Andrew Hauser also speaks, following the bank’s policy decision on Tuesday.

With US inflation figures to be released later on Wednesday after Asian markets close, potentially a key factor in whether the Fed cuts rates next week or not, investors may be inclined to hold the line and keep risk exposure to a minimum.

Tuesday’s market moves would feed into that mindset. World stocks fell for a second day in a row, something that last happened a month ago, while the rise in bond yields and the dollar tightened financial conditions further.

Investors may be extra sensitive to any rise in bond yields this week, as the US Treasury sells USD 125 billion of notes and USD 85 billion of bills.

Japanese government bond yields and the yen may also be sensitive to Wednesday’s producer price numbers from Japan, especially after the substantial upward revision to third-quarter GDP growth on Monday.

Meanwhile, investors and market watchers continue to try to figure out if Beijing’s historic shift in its monetary and fiscal policy stance this week will be matched by equally bold action.

The economy certainly needs it. The latest trade figures on Tuesday were uniformly weak, with the near-4% year-on-year slump in imports last month particularly alarming. That was significantly worse than the bleakest forecast in a Reuters survey of 21 economists of a 3% decline, and highlights how brittle domestic demand is.

The 10-year Chinese bond yield fell further on Tuesday to a new all-time low of 1.877%. It has fallen more than 15 basis points so far this month, and it is on track for its steepest monthly fall since July 2021.

Some analysts reckon the decline this week is a positive reaction to Beijing’s shift, as it shows investors are anticipating a significant loosening of monetary policy soon.

There may be something to that, and substantial policy easing could indeed reflate growth and asset prices. But it’s hard to disentangle the move in yields from the latest trade and inflation data that are a reminder of just how heavy the deflationary and weak demand pressures bearing down on the economy actually are.

The Indian rupee, meanwhile, is anchored at a record low, with rate cut hopes rising after the government named career civil servant Sanjay Malhotra to replace outgoing Reserve Bank of India Governor Shaktikanta Das.

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

– South Korea unemployment (November)

– RBA Deputy Governor Andrew Hauser speaks

– Japan producer inflation (November)

(Reporting by Jamie McGeever)