A Look Ahead in Asian Markets

By Jamie McGeever

Investors in Asia kick off the new trading month on a positive note, buoyed by optimism regarding a U.S. ‘soft landing’ and a dovish outlook from the Federal Reserve, which should enhance risk appetite and the attractiveness of emerging market assets.

The recent decline of the dollar, decreasing U.S. bond yields, and a global equity rebound have led to a notable easing of financial conditions, fostering a cycle of increasing bullishness.

Last week’s data indicated that U.S. growth surpassed expectations while inflation moderated, aligning with the Fed’s plans to initiate an easing cycle later this month. Alongside a decent Q2 earnings season, a ‘Goldilocks’ scenario is unfolding.

However, as always, complacency poses a risk—events like the volatility shock on August 5 can happen unexpectedly, and the next one might have a lasting impact. Additionally, concerns surrounding China are present.

China’s ‘official’ purchasing managers index (PMI) data released on Saturday provided an initial glimpse of the economy’s performance in August, revealing alarming signs: factory activity is declining, deflationary pressures are mounting, and the need for stimulus is increasing.

Manufacturing activity fell to a six-month low, contracting for the fourth consecutive month as factory gate prices plummeted and owners struggled to secure orders. Although services activity showed some improvement, growth remains minimal.

Indeed, the composite PMI fell to 50.1, the lowest level since December 2022 when China re-opened, indicating nearly stagnant growth.

The ‘unofficial’ manufacturing PMI will be released on Monday, with the Caixin PMI index expected to rise to 50.0 from 49.8—essentially indicating no growth from slight contraction. Manufacturing PMIs from other Asian countries, including Japan, India, Australia, and South Korea, will also be published.

Traders are expected to closely monitor the yuan, which is at its strongest level against the U.S. dollar in 15 months due to increased corporate demand and anticipated rate cuts in the U.S.

Market activity and overall liquidity are expected to be lighter than usual as U.S. markets are closed on Monday for Labor Day, yet the overall backdrop remains positive.

According to Goldman Sachs’s indices, emerging market financial conditions are at their loosest in over a year, U.S. conditions are the most relaxed in more than two years, and global conditions are the loosest in nearly two-and-a-half years.

The 10-year U.S. Treasury yield decreased by 20 basis points in August, marking the fourth consecutive month of decline.

The S&P 500 has risen for the fourth straight month and is nearing July’s record high. The MSCI World index reached a new high, while the MSCI Asia ex-Japan index has risen six out of the last seven months.

Key Developments for Asian Markets on Monday:

• China, Japan, and others’ manufacturing PMIs (August)
• Indonesia inflation (August)
• Australia company profits (Q2)