Asian equities might face challenges in trading due to a deterioration in global risk, as risk sentiment in the US weakened yesterday following a credit note downgrade. This change has added extra turbulence for Asian risk assets. Compounding this uncertainty are recent reports that US President Joe Biden is facing calls to limit further American investments in Chinese stocks and bonds. An expected executive order next week has led to these requests, and Mike Gallagher, Chair of the House China Committee, has urged the order to extend to include US involvement in Chinese public markets, not just private equity and venture capital groups. This development may lead to increased risk aversion and hedging in anticipation of next week’s commercial decision.
On a more positive note, those trading cyclical stocks are closely watching the People’s Bank of China (PBoC) and the Chinese government for signs of further economic support. Recent reports noted that the PBoC conducted meetings last Thursday to back private firms, underscoring China’s commitment to continued economic growth.
In the upcoming trade session, attention will turn to the US Nonfarm Payrolls report. Although slowing payroll growth and moderated wage increases for July are expected, various indicators suggest a positive outcome may be on the horizon. Market participants and Federal Reserve analysts are focused on July’s figures. If results match consensus, this could support the likelihood of another Federal Open Market Committee (FOMC) rate hike.
Should the overall data exceed expectations, it could exert further pressure on risk assets and boost demand for safe-haven positions. This could result in price action direction indicators such as US Treasuries and the USD, with potential selling off in US equities, consequently affecting global risk. Conversely, falling short of expectations may raise concerns of a recession and trigger a more cautious repricing of the Federal Reserve’s strategy for the coming year. In this scenario, markets might anticipate more than 100 basis point cuts for 2024, altering the financial landscape.
