‘Risk on’ as Powell signals Fed still on easing track

Asian markets on Friday round off a monumental week on the front foot after Federal Reserve Chair Jerome Powell on Thursday expressed confidence in the US economy and that inflation will continue to cool, signaling further interest rate cuts ahead.

In his press conference after the Fed cut rates by 25 basis points as expected, Powell said the economy could perform better next year than previously thought, and that inflation remains on a path back to the 2% target.

This added fuel to the US equity rally already underway following Donald Trump’s thumping victory in the US presidential election on Tuesday, pushing the three main US indices to new all-time highs.

The equity rally was also aided by lower Treasury yields and a weaker dollar – the 10-year yield fell 10 basis points for its biggest one-day fall in three months, and the dollar shed 0.7%.

Asian stocks ex-Japan go into Friday’s session up almost 2% on the week, which would be the biggest rise in five weeks. Over the month of October though, outflows rose sharply.

Japan’s Nikkei is up 3.5%, on course for its best week in six. Many analysts are increasingly bullish on Japanese stocks, citing attractive valuations and an assumption that the yen stays weak.

The outlook for Asian stocks in a Trump world more broadly, however, is mixed.

On the one hand stronger demand and a buoyant Wall Street are positive forces for emerging Asia. But on the other, a stronger dollar and higher US bond yields could tighten financial conditions and encourage capital outflows from some countries.

Chinese stocks, in particular, are vulnerable. But as SocGen analysts note, the threat of punishing tariffs from Washington could accelerate more forceful policy responses from Beijing, which may end up supporting local stocks.

Meanwhile, attention in Asia turns to China as investors await a readout from the National People’s Congress Standing Committee meeting which concludes on Friday. Any stimulus surprise from the meeting will likely help lift market sentiment in China stocks.

The yuan on Thursday bounced back a bit from the three-month low struck the previous day. The yuan’s fall on the spot market of around 1% on Wednesday, an immediate reaction to Trump’s election win, was its biggest decline since February 2020.

Investors will also cast an eye to Chinese inflation data on Saturday. Strong exports data on Thursday offered encouraging signs that growth may be recovering, but imports fell short of forecasts, suggesting domestic demand remains weak.

The annual rate of consumer inflation is expected to have held steady at 0.4% in October, according to a Reuters poll, while producer price deflation is seen easing only a little to -2.5% from -2.8%.

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

– Taiwan trade (October)

– Japan household spending (September)

– China NPC Standing Committee readout

(Reporting by Jamie McGeever; Editing by Deepa Babington)