Political jitters ripple ahead of central bank fest

A look at the day ahead in Asian markets.

Asian market sentiment is likely to remain subdued on Tuesday following the release of mixed Chinese economic data the day before, as investors digest unnerving political events in key developed economies ahead of several G10 central bank interest rate decisions later this week.

The resignation of Canada’s finance minister and vote of no confidence in Germany’s Chancellor on Monday come on the heels of a surprise credit rating downgrade for France on Friday. While not impacting emerging markets directly, these could all encourage investors to reduce risk exposure ahead of the central bank policy blitz.

On the other hand, the dollar and US bond yields were very well contained and US stocks rose sharply again on Monday – the Nasdaq clocked its 36th closing record high of the year – as investors anticipate a rate cut from the Federal Reserve on Wednesday.

The Japanese yen fell for a sixth consecutive day on Monday to a one-month low through 154.00 per dollar as traders cool on the prospect of a rate hike from the Bank of Japan this week or even in January.

Some of Japan’s recent economic indicators have been fairly strong, which on top of the national wage growth settlements being agreed, would appear to bolster the case for the BOJ moving sooner rather than later.On the other hand, Japan’s economic surprises index last week hit its lowest in two and a half years. BOJ officials will also be nervously eyeing the heating up of US-China trade tensions and pondering the potential fallout if Beijing allows a significant depreciation of its currency.

A slim majority of economists in a Reuters poll published on Friday said the BOJ will keep borrowing costs on hold again this week. Last month’s poll showed a slim majority predicting a hike.

Elsewhere in Asian currency markets, the South Korean won sold off again on Monday, as the country’s Constitutional Court began reviewing the impeachment of President Yoon Suk Yeol over his Dec. 3 martial law proclamation. The process will decide if he will be removed from office, while investigators plan to question him this week on criminal charges.

The won is within sight of the low of 1443 per dollar on Dec. 3, its weakest level in two years. A break below 1445 per dollar will mark its weakest point since March 2009.

Sentiment towards Chinese assets remains mixed. Official data from Beijing on Monday showed that foreign institutions cut holdings in Chinese onshore bonds for the third month in a row. The official disclosure chimes with recent figures from the Institute of International Finance, which recorded outflows in both China’s bond and equity markets in November.

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

– Hong Kong unemployment (November)

– Singapore trade (November)

– Germany Ifo and ZEW surveys (December)

(Reporting by Jamie McGeever;)