Pivot party rolls on

Dec 15 – Asian markets are set to end the week on the front foot as another steep slide in the dollar and US bond yields extends the Fed-fueled buying frenzy, although some investors may be tempted to take some chips off the table ahead of the weekend.

The Dow climbed to a fresh all-time high on Thursday and the S&P 500 and Nasdaq made new 2023 highs, while the MSCI emerging market and Asia ex-Japan indexes both rose around 2%.

Unless the MSCI World index slumps around 2.5% on Friday it will chalk up its seventh weekly rise in a row, its best run in six years.

That should provide enough momentum to keep Asia in the green on Friday, although a batch of Chinese economic indicators and central bank decision on one-year lending rates could knock markets off course.

The latest Chinese retail sales, industrial production, business investment, unemployment and house price data for November will be released, and investors will be looking for signs of growth or, in some cases, accelerating growth.

China’s central bank, meanwhile, is expected to keep its one-year lending rate steady but increase liquidity injections.

But sentiment around China’s economy and markets is bleak, and it will take more than a few data points to lift meaningfully. The underperformance of Chinese stocks is the main reason Asian markets have lagged their US and global peers.

Since the last week of October, in which time US and global indexes have jumped 15% or more, the MSCI emerging and Asia ex-Japan indexes have risen 10%.

The Chinese blue chip CSI 300 index is in the red, down 13% this year, and is near a five-year low.

The bullish narrative global markets are running with, however, is that the US economy will achieve its ‘soft landing,’ giving the Fed room to pivot towards rate cuts earlier and more aggressively than many had thought.

That was given an implicit seal of approval by the Fed itself in the revised Summary of Economic Projections.

But as is invariably the case, markets may have overshot. The two-year US yield is down 35 basis points this week, the 10-year yield has crashed below 4% and markets are pricing in 150 bps of Fed rate cuts next year – twice as much as the Fed’s median forecasts indicate.

There are other reasons to warrant caution – the European Central Bank and Bank of England don’t appear to be willing to follow the Fed’s dovish lead, Norway’s central bank raised rates on Thursday, and oil jumped more than 3% on Thursday.

And next week we have the Bank of Japan’s policy meeting, potentially the biggest curveball of the year.

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

– China retail sales, unemployment, house prices, business investment, industrial production (November)

– Japan flash PMIs (December)

– Australia flash PMIs (December)

(By Jamie McGeever; Editing by Josie Kao)