Asian markets are poised to exhibit a mixed yet potentially positive trading pattern as they align with the global momentum for a catch-up risk-on trade at the opening. This comes on the back of a noticeable uplift in global equities and a pullback in the USD, which retraced from its zenith of 106.750 to a nadir of 106.02, reinforcing support notably at the 106 level. This currency depreciation unfolded concurrently with a significant diminution in front-end yields. It was bolstered by a strong risk appetite manifesting in a broad upswing across all risk asset classes. In terms of potential market disturbances, the forthcoming session is anticipated to be particularly eventful.
Market participants will be closely monitoring developments in Washington, where discussions among U.S. lawmakers are intensifying as they grapple with a spending bill. The deadline for an agreement is September 30, a date of significance, as any failure to reconcile could precipitate a government shutdown, thereby instigating market volatilities, propelling U.S. yields, and compressing equity valuations.
Adding another layer of complexity, it’s crucial to observe that technical trades are poised to guide market movements. With the quarter-end trade on the horizon and the impending extended holidays in China, there is a potential for these factors to act as a headwind to risk as the session progresses. Concurrently, traders scrutinise the forthcoming Consumer Spending data and August US Personal Consumption Expenditures. The latter serves as the Federal Reserve’s preferred measure of inflation and is forecasted to remain consistent on a monthly basis. Any upside in this data could prompt market players to reassess the U.S. rate trajectory for the year-end, potentially recalibrating for a heightened probability of an additional 25 bps hike by the Fed. This, in turn, could pave the way for a subsequent series of rate reductions in 2024, suggesting an elevated terminal rate. The market’s interpretation of these developments could prove pivotal; a hawkish reception may apply downward pressure on risk assets, while a dovish one has the potential to rejuvenate risk appetite following a week characterised by substantial risk aversion.
