Morning Deal: Fed Will Soften Juice Risk Appetite

Federal Reserve Chairman Jerome Powell speaks during a meeting of the Economic Club of New York in New York, U.S., October 19, 2023. REUTERS/Brendan McDermid/File Photo Acquire Licensing Rights

Nov 2 (Reuters) – A look at the day ahead in Asian markets from financial markets columnist Jamie McGeever.

Asian markets are expected to open higher on Thursday, buoyed by yesterday’s rally on Wall Street, as investors’ dovish interpretation of Fed Chairman Jerome Powell’s news conference sent U.S. Treasury yields to a two-week low.

Thursday’s Asia-Pacific economic calendar is light on volume but quite big on importance – the main indicators are inflation in South Korea and trade in Australia, while the biggest policy agenda item is the Malaysian central bank’s decision on interest rates.

Investors will also continue to analyze the effects of the Bank of Japan’s decision to lower the 1% cap on the yield of 10-year bonds – on Wednesday, the BOJ entered the bond market, the yen recovered from losses after reaching the lowest level in a year and the Nikkei rose by 2.4%, which was the third best day of the year.

Wednesday’s actions on global markets should set the tone for Thursday’s session in Asia. The MSCI World share index rose just over 1%, its best day since August, while the Nasdaq rose 1.6%, its fourth straight gain, also its best day since August.

The 10-year Treasury yield fell 14 basis points, the biggest decline since March.

While Powell left the door open to further monetary tightening, markets felt he was not as hawkish as he could be. If this sentiment continues to dominate Asia on Thursday, markets across the continent should benefit.

However, the mood towards Chinese markets may be less optimistic.

Short-term interest rates in China have risen, especially among non-bank financial institutions, with overnight borrowing costs rising as high as 50% for some Chinese financial institutions amid a month-end battle over tight cash liquidity and tight money markets.

On the economic front, factory activity in China unexpectedly declined in October, renewing concerns about the country’s fragile economic recovery at the start of the fourth quarter despite better-than-expected third-quarter GDP data a few weeks ago.

Uncertainty continues to swirl around the creaking real estate sector, where developer Evergrande has proposed a new debt restructuring plan for offshore bondholders, offering to swap their debt for about 30% equity stake in each of the developer’s two Hong Kong-listed subsidiaries.

In South Korea, Thursday’s data is expected to show annual inflation in October reduced again to 3.60% from 3.70%, which would provide some relief to policymakers after it accelerated from a two-year low of 2.30% in July.

Malaysia’s central bank is expected to keep its key interest rate at 3% until 2024 despite a weakening ringgit, amid stable domestic inflation and steady growth prospects.

Inflation is currently at 1.9%, the lowest since March 2021, and well below the government’s estimate of 2.5-3% for this year, so the central bank has some room to hold off and wait and see.

Here are the key developments that could give markets more direction on Thursday:

– Malaysian interest rate decision

– CPI inflation in South Korea (October)

– Trade with Australia (October)

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