Treasuries relief, China grief

Oct 24 – Investors hoping for a reprieve from the US bond-selling frenzy got their wish on Monday, which should bode well for Asian markets on Tuesday, although the doubts about how long the calm lasts are bound to swirl.

The regional economic calendar on Tuesday is light, the highlights being South Korean producer price inflation for September, October’s flash purchasing managers index data from Japan and Australia, and a speech from Reserve Bank of Australia governor Michele Bullock.

All of these could trigger short-term moves in the respective currencies, which all gained ground to varying degrees against the beaten-down dollar on Monday.

September’s PMIs showed that manufacturing activity in Japan and Australia shrank and services sector activity grew, although growth in Japan was the slowest this year.

The big picture, however, is still dominated by the ebb and flow of the US Treasuries market. The 10-year yield finally broke above 5.0% on Monday but quickly tumbled, and the peak-to-trough slide of 20 basis points pushed US stocks into positive territory for most of the day and dragged down the dollar.

All of that paves the way for a ‘risk-on’ day across Asia on Tuesday, right? Not necessarily.

Wall Street gave back most of its gains in late trading, with only the Nasdaq out of the three main indexes closing in the green – an intuitive move, perhaps, given the tech sector’s sensitivity to interest rates.

And while a broad easing of financial conditions on Monday – lower Treasury yields and a weaker dollar – should support emerging market assets, Wall Street’s late downward drift will warrant caution.

So will the latest signals from China, which continues to post substantial capital outflows.

According to Goldman Sachs, outflows in September jumped to USD 75 billion, the biggest monthly figure since 2016, up from a still hefty $42 billion in August.

“The unfavorable interest rate spread between China and the US will likely imply persistent depreciation and outflow pressures in coming months,” Goldman analysts warned.

Blue chip Chinese stocks on Monday hit their lowest level since February, 2019, and given China’s weight in Asian and emerging market equity indexes, Tuesday could be a challenge.

The MSCI Asia ex-Japan and MSCI global emerging market indexes are both down around 13% over the past three months and on Monday both hit their lowest level since Nov. 11 last year.

Japan’s yen and bonds will be under the spotlight again on Tuesday after the yen briefly slipped below 150.00 per dollar and the 10-year yield hit a fresh decade-high on speculation the Bank of Japan could tweak its yield curve control policy later this month.

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

– Japan flash manufacturing PMI (October)

– Australia flash PMI (October)

– South Korea producer price inflation (September)

(By Jamie McGeever; Editing by Josie Kao)