Growth fears mount, ‘bad news is bad news’?

Asian markets could be in for a choppy ride on Tuesday, with investors unsure whether to interpret Monday’s steep fall in US Treasury yields and the dollar as an encouraging sign for risky assets or a warning that growth is evaporating.

Given that Asian shares on Monday posted their biggest rise this year, before the weak ISM US manufacturing report triggered the slide in yields, investors may err on the side of caution and pare back risk exposure, not add to it.

If so, it will suggest the ‘bad news is bad news’ narrative is taking hold – easing financial conditions on their own are not enough to lift asset prices; instead, the deteriorating macro conditions driving down yields and the dollar are what’s important for asset prices.

By some measures, a shift in the US economic outlook is already underway. The Atlanta Fed on Monday slashed its GDPNow model forecast for second quarter growth to 1.8% from 2.7%. Two weeks ago it was 3.5%, and three weeks ago it was over 4.00%.

The sugar high of rate cut expectations can only last so long. And in truth, rate cut expectations have not shifted all that much lately because inflation remains stickier than policymakers would like.

The US growth engine is particularly important for Asia right now because China’s post-lockdown recovery is so fragile, and uncertainty persists around Japan’s policy normalization, rising bond yields, and record weak currency.

That’s the backdrop to Asian markets on Tuesday which also sees the release of manufacturing PMI data from Malaysia and Thailand, South Korean inflation, and the official results from India’s general election.

Indian markets’ initial reaction on Monday to the weekend’s exit polls showing a decisive mandate and third term for Prime Minister Narendra Modi was overwhelmingly positive – shares hit lifetime highs, the rupee gained and bond yields dropped.

The broader Nifty index closed 3.25% higher at 23,263.90 points after touching a record high 23,338.70 earlier in the day, while the BSE index closed up 3.39% at 76,468.78 points, just off its lifetime peak of 76,738.89 also touched earlier.

India’s boom helped drive the continent’s stocks higher. The MSCI Asia Pacific ex-Japan index snapped a four-day losing streak, surging more than 2% for its best day since November.

Surprisingly strong factory activity from China, and to a lesser extent South Korea and Taiwan, also helped. China’s ‘unofficial’ Caixin/S&P Global manufacturing PMI report showed the fastest pace of growth since June 2022, contrasting with an official survey on Friday that showed a surprise fall in activity.

The Caixin survey is believed to be skewed more toward smaller, export-oriented firms, which may help explain why Asian stocks took off so much on Monday. Some of that optimism, however, may cool on Tuesday.

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

– South Korea inflation (May)

– India election results

– Australia current account (Q1)

(Reporting by Jamie McGeever; Editing by Josie Kao)