By Jamie McGeever
(Reuters) – A look at the day ahead in Asian markets.
The first full trading week of 2025 kicks off in Asia on Monday with the sharp drop in the Chinese currency and bond yields, an increasingly tense and fluid political situation in South Korea and a blocked US-Japanese corporate merger all vying for attention of investors.
A range of Purchasing Managers Index reports are also available, offering investors an early glimpse into how much of Asia’s largest economies, including China, have ended 2024.
The global market environment looks relatively rosy after Friday’s recovery on Wall Street, and volatility in the stock and bond markets appears to be well under control.
But emerging market currencies and assets are defensive, thanks to high US Treasury yields and a surging dollar. The dollar weakened slightly on Friday, but hit a new two-year high a day earlier and has risen almost 10% in the past three months.
Much of the dollar’s appeal comes from the sharp rise in long-term U.S. Treasury yields since the Fed began cutting rates in September. The central bank’s easing of 100 basis points has been accompanied by a 100 basis point increase in 10-year yields, a remarkable turn of events that has fooled most investors – and probably policymakers as well.
The picture in China could not be more diverse. As investors prepare for a year of policy easing and liquidity provision from Beijing, the yuan and bond yields are coming under heavy downward pressure.
Attention is focused on the short end of the Chinese curve, with the two-year yield on the verge of dipping below 1.00%. It is already the lowest on record, having fallen 50 bps in the past two months and 100 bps since last March. The psychological barrier of 1.00% could be broken on Monday.
In this context, China’s inflation figures will become even more important later this week, with a Reuters poll showing annual consumer inflation held steady at 0.2% in December. Although China’s economic surprise index has risen in recent weeks, markets will be very sensitive to additional deflationary pressures.
The spot yuan slid to a four-month low on Friday, breaching the 7.30 per dollar level that the People’s Bank of China seemed to be defending. A rise above 7.35 per dollar would mark a new 17-year low.
The selling pressure on the yuan appears to be quite strong, as evidenced by the difference between the spot dollar/yuan rate and the central bank’s daily setting. It is now the widest since last July and hovering around the widest level on record.
