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Asia is set to launch the final comprehensive trading week of 2024 with the pivotal ‘China data dump’ on Monday, setting the stage for what promises to be a dynamic close to the year.Investors, buoyed by a wave of global monetary easing, are keen to extend the equity bull run as central banks worldwide slash rates and China vows deeper economic stimuli.Amid this backdrop of fervent market activity, geopolitical undercurrents add a layer of intrigue. South Korea is still reeling from political aftershocks following President Yoon Suk Yeol’s dramatic impeachment over his sudden declaration of martial law. At the same time, this not wholly unexpected twist could add a touch of volatility to the South Korean won, although the market impact is expected to be subtle rather than seismic. Stepping into the fray is Han Duck-soo, a seasoned technocrat whose diplomatic finesse and comprehensive governmental experience are anticipated to stabilize the nation during these turbulent times.Chinese equities face their own challenges. Last week’s vague promises from Beijing to invigorate consumer spending left investors wanting more, leading to a selloff in mainland stocks. Regulatory promises over the weekend to further shore up the property and equity sectors ahead of critical retail and industrial production data may provide some reassurance, but market sentiments remain tentative.In Japan, the Bank of Japan (BOJ) is still in a gradual tightening monetary policy mode, diverging sharply from the global easing trend. Despite a robust ‘Tankan’ survey indicating promising business conditions, a rate hike seems unlikely as Japan navigates the competitive devaluation of neighboring currencies, anticipating the incoming U.S. administration’s tariff strategies.The focus on the People’s Bank of China (PBoC) intensifies as it navigates the yuan’s path against expected U.S. tariffs. Although initial reports suggested a potential devaluation to counteract tariffs, official statements have since moderated, aiming to prevent a precipitous drop and trigger capital outflows. Of course, it’s a matter of time before the USDCNH trades + 7.35 as a weaker yuan. It merely reflects economic fundamentals and would aid in combating deflationary pressures, which are signalled by plunging 10-year Chinese bond yields.As we edge closer to the ‘America First’ inauguration day, the chorus calling for a yuan devaluation might grow louder, signaling increasing market anticipation of significant shifts in U.S. trade policy. This crescendo of concerns could set the stage for a more pronounced move in the USDCNH as stakeholders adjust to the expected trade barrier directives from the new administration.As the year wraps up, seasoned FX traders recalibrate, potentially unwinding positions to anticipate year-end flows favoring dollar selling. This strategic shift aligns with a historical uptick in EUR/USD amid this year’s “ year-end FX rebalancing “ after U.S. equities’ strong performance.Finally, all eyes turn to the U.S. Federal Reserve, which is expected to trim rates at the year’s climactic FOMC meeting. Despite cooling inflation and sustained positive real rates, the economic landscape—with slowing job growth and emerging signs of the housing market cooling—argues for a cautious cut ahead of known unknowns around incoming President-elect Donald Trump’s tax and trade policies. Traders, bracing for a potentially hawkish tilt, are positioning for nuanced shifts in Fed policy as the year ends on a note of calculated optimism amid global uncertainties.
PRE-ASIA MARKET OPEN: Tech & Communication Are Santa’s Leading Reindeer in the Holiday RallyMarketsLast week, Wall Street experienced some uncertainty, yet the broader markets remained close to record highs, flirting with the potential for another historic rally. The S&P 500 saw a slight dip but stayed near its recent peak. Although gains in the communications and consumer discretionary sectors added some sparkle, the overall index was weighed down by declines in other sectors.Amid this backdrop, the Nasdaq 100 surged, driven by a stellar 24% leap in Broadcom, catapulting its market value to the trillion-dollar club. This surge was underpinned by a feverish demand for AI chips, echoing gains across the tech sector and reinforcing the ‘TINA’ (There Is No Alternative) narrative. As tech giants and chip mavens propelled the index to new zeniths, it seemed the entire market might ride this wave into the new year.Not all was smooth sledding on the trading floors. The broader S&P 500 and the industrious Dow Jones took modest steps back, signalling a bullish yet selective market, deeply entrenched in the tech-driven rally yet wary of overextension. This week’s Fed cut is entirely baked in. However, with the Federal Reserve’s 2025 opening act poised to pull back the reins potentially, and with the spectre of Trump-era tariffs looming, the markets are skating on exhilarating yet thin ice.This selective rally, spearheaded by unyielding tech titans, has positioned the US markets as a beacon of profitability in contrast to the tumultuous economic landscapes of Europe and China. Yet, the financial terrain could see a significant reshuffle as 2025 looms with its promise of political shifts and policy upheavals.Riding high on tech euphoria, investors are tugging at the reins of the proverbial Santa’s rally sleigh, hoping to glide through the holiday season into a new year filled with gains. Yet, with every chip stock surge and AI investment, the question lingers—will this sleigh ride encounter turbulence as global dynamics shift, or will the ‘TINA’ effect continue to pull the sleigh smoothly along the bull market’s snowy path? Only time will tell if this rally can sustain its magical ride or if caution will cool the runners on Wall Street’s sleigh.The ViewWhile QQQ and SPY maintain their bullish stances, the anticipated Santa rally might only have a few weeks left before facing a significant correction. For the rally to sustain momentum, it’s crucial that sectors other than tech and communications—Santa’s current leading reindeer—start contributing. The market could significantly adjust lower if other sectors don’t step up soon.2025 Central Bank Policy OutlookLooking ahead, 2025 presents a canvas rife with uncertainty, particularly with looming US trade policies under the incoming administration likely to impose a protectionist stance that could ignite a trade war. The global economic landscape is delicately poised, with the European Central Bank (ECB) and the Bank of England (BoE) anticipated to cut rates further in a bid to stimulate economies facing various pressures—from geopolitical tensions to internal policy challenges.The ECB finds itself breathing a tad easier as inflation edges closer to its target. Yet, the broader Eurozone’s economic pulse is slowing under restrictive monetary policies, prompting calls for a significant 100 basis point rate cut. Europe stands at a crossroads, facing both internal and external pressures: ongoing Russian aggression in Ukraine and escalating trade tensions with China and the US threaten to either splinter or solidify European unity. In response, EU leaders are mulling over increasing defence spending to 3% of GDP, especially as President-elect Trump flirts with the idea of a NATO exit.Brussels aims to sidestep potential tariffs by boosting imports of US LNG, hoping to balance Europe’s trade surplus with the US. Meanwhile, Germany emerges as a key vulnerability, wrestling with its sluggish transition to electric vehicles, overreliance on Chinese imports for critical materials, aging workforce, and energy-intensive manufacturing base. The push to relax fiscal constraints to fuel investment is gaining traction, with hopes that a new coalition government, likely under the CDU after February’s elections, will pave the way for these changes.France remains in a political deadlock with a fractured parliament, complicating any significant policy implementations or budget approvals that could appease Brussels, potentially until an early presidential election reshapes the landscape. Across the Alps, Italy’s Prime Minister Meloni uses her robust parliamentary majority to tighten fiscal belts, aiding in deficit control. Amid these swirling dynamics, the euro teeters on the brink of parity with the dollar as Q1 approaches.The spotlight isn’t on tariffs in the UK due to a modest trade deficit with the US. The domestic scene is more pressing. The Labour Party, firmly in control until 2029, faces growing discontent due to tax hikes under Chancellor Reeves’ budget, especially from the business sector. Employers are grappling with a substantial 6.7% increase in minimum wages and a rise in National Insurance contributions, leading to the steepest decline in job vacancies in four years and a significant drop in business confidence to a two-year low. Rumours are swirling about slower wage increases.However, an unexpected factor might restrain the Bank of England (BoE) from implementing more aggressive rate cuts. The budget’s impact was less severe than anticipated, suggesting that inflation might persist more. The expectation is for three rate cuts from the BoE, compared to four from the European Central Bank (ECB). This policy divergence could further widen the interest rate differential, potentially bolstering the GBP as it becomes more attractive relative to the euro..The Bank of Japan (BoJ) is setting itself apart by tightening its monetary policy throughout 2024, and it appears set to maintain this stance into 2025, potentially driving the Japanese Yen to ¥145 in Q1 or Q2 2025.Real wages in Japan are rising—businesses are responding to Prime Minister Ishiba’s ambitious initiative to increase wages by over 7% before the decade closes. The country’s largest union has already secured a more-than-5% wage hike this past spring, fueling optimism that households will see sustained real earnings growth and boost their spending accordingly.Down Under, the Reserve Bank of Australia (RBA) looks ready to shift gears. After a year on the sidelines, emerging signs of inflation creeping back to its 2%-to-3% target have the RBA poised for action. Governor Bullock hinted at a dovish turn in December, expressing growing confidence that inflation aligns closer to the target’s midpoint. With a job report and a quarterly CPI review due before the RBA’s first 2025 meeting, these indicators are expected to justify an initial rate cut in February, signaling Australia’s potentially less restrictive monetary year.The ViewIf these developments unfold as anticipated—with Japan tightening its monetary policy more rapidly than expected and the Eurozone continuing its easing—EUR/JPY could well drop below 150 in the first half of 2025. This divergence, characterized by a strengthening yen and a weakening euro, could make for a remarkably profitable period for those shorting EUR/JPY crosses. Such a scenario hinges on the Bank of Japan accelerating its rate hikes, further amplifying the yen’s appreciation against the euro and other major currencies.More By This Author:
Asia Open: Investors Eye Bull Run Extension Amid Global Monetary Easing Wave
