Asian equities are poised for positive trading following a volatile session on Wall Street. The main catalyst behind the volatility was the behaviour of US Treasuries yields, notably the bull-flattening shift, reversing an earlier bear-steepening that had driven the 10-year yield above 5% for the first time this economic cycle. This shift in US yields was largely associated with Bill Ackman, the hedge fund manager of Pershing Square, revealing his decision to close his short position on bonds. Ackman highlighted the considerable risks of maintaining a short position on bonds in the current climate of long-term rates. Consequently, the 10-year Treasury yield, which had surpassed 5% in early trading, fell below this mark. This move weakened the USD and bolstered equities. If the yield continues to drop, we could see increased investment in riskier assets, setting the stage for a potential uptrend in equities and bonds as the year-end approaches.
On the FX front, all eyes are on the Japanese yen due to rumours about alterations to the Bank of Japan’s monetary policy framework. Sources suggest that the Bank of Japan might modify its Yield Curve Control (YCC) strategy. This speculation boosted the Yen, but further fluctuations might impact the upcoming BoJ meeting. Any hawkish speculation could boost the JPY in the short term as participants would try to anticipate a pivot from the BoJ.
On the geopolitical front, energy market dynamics remain unpredictable due to escalating tensions in the Middle East. The dialogue between Israel and Hamas is strained, primarily because of disagreements over fuel provisions. Monitoring oil prices is crucial, as any positive developments in the Israel-Gaza situation could decrease the geopolitical risk factor, influencing global risk sentiment.
