Jamie McGeever
(Reuters) – Future outlook for Asian markets.
Asian investors started the new trading month on a positive note, optimistic about a “soft landing” in the United States and a dovish outlook from the Federal Reserve, which is expected to boost risk appetite and the attractiveness of emerging market assets.
The recent weakening of the dollar, falling U.S. Treasury yields, and rising stock prices globally have significantly eased financial conditions, creating a virtuous cycle that strengthens the bull market.
Data from last week showed US economic growth was beating expectations and inflation was slowing just as the Fed is set to begin an easing cycle later this month. Add in strong second-quarter earnings and a “Goldilocks” scenario is clearly emerging.
But as always, the danger at times like these is complacency. An event like the August 5 volatility shock is always lurking, and the next time, its effects may not be so temporary. And then there is China.
China’s “official” Purchasing Managers’ Index data released on Saturday was the first to reveal how the world’s second-largest economy performed in August, painting a grim picture with factory activity sluggish, deflationary pressures growing and the need for stimulus measures growing.
Manufacturing activity fell to its lowest level in six months, shrinking for the fourth straight month, as falling gate-level prices and managers struggled to secure orders. Service activity accelerated, but growth in the sector has been negligible.
Indeed, the composite PMI fell to 50.1, the lowest since December 2022 when China’s economy reopened, signaling little growth.
China’s “unofficial” manufacturing PMI is due to be released on Monday. The Caixin PMI index is expected to rise to 50.0 from 49.8, effectively moving from a slight contraction to “no growth.” Pan-Asian manufacturing PMIs, including those for Japan, India, Australia and South Korea, are also due to be released.
Traders are also noting that the yuan is at its highest level against the U.S. dollar in 15 months as corporate demand for the currency rises and a U.S. interest rate cut is on the horizon.
US markets will be closed on Monday for Labor Day, meaning overall liquidity and market activity will be lower than normal, however the overall picture is expected to remain positive.
According to Goldman Sachs indicators, emerging market financial conditions are the easiest in more than a year, U.S. financial conditions are the easiest in more than two years, and global financial conditions are the easiest in almost two and a half years.
The 10-year U.S. Treasury yield fell 20 basis points in August, its fourth consecutive month of declines.
The S&P 500 has risen for a fourth straight month, coming back within reach of its all-time high from July, the MSCI World Index has hit a new high and the MSCI Asia ex Japan Index has risen for the sixth straight month out of the past seven.
Key trends that could provide further direction for Asian markets on Monday include:
– China, Japan and other countries manufacturing PMI (August)
– Indonesian Inflation (August)
– Australian corporate profits (Q2)
(Reporting by Jamie McGeever; Editing by Diane Craft)
