Financial markets columnist Jamie McGeever discusses the outlook for Asian markets.
Asian markets are expected to start on the defensive on Tuesday, weighed down by fears of global inflation and a “long term of high interest rates” rather than the aftermath of a short-lived uprising by Russian mercenaries against the Kremlin.
Wall Street closed in the red on Monday, the Nasdaq fell more than 1% in three of four trading days, and the U.S. yield curve has accelerated to near-historic levels.
But more than geopolitical concerns, inflation and policy worries are driving sentiment. Traditional “safe haven assets” such as gold, bonds, the yen, the Swiss franc and the US dollar saw small, sometimes negligible gains on Monday.
The Bank for International Settlements warned on Sunday that the global economy had reached a critical juncture in its fight against inflation and called for further rate hikes. Gita Gopinath of the International Monetary Fund said on Monday that investors may be too optimistic about the speed and cost of curbing inflation.
Investors will likely pick up where the US market left off on Monday as there are no key Asian economic data, policy decisions or policy maker speeches scheduled for Tuesday.
The US 2yr/10yr yield curve inverted further on Monday to 104 basis points. That’s just 6bps away from the historic 110bps reversal in yields immediately following the US Municipal Bank shock in March.
Every U.S. recession in the last half century has been preceded by an inversion curve. Is it different this time? So far it seems so, but a Fed paper on Friday concluded that restrictive policies “could contribute to a marked slowdown in investment and employment in the short term.”
Meanwhile, in the corporate world, Japan has ramped up efforts to bolster its chip industry, with a government-backed fund agreeing on Monday to buy semiconductor materials maker JSR Corp for about $6.4 billion.
The move by the Japan Investment Corporation (JIC), under the supervision of the Ministry of Trade, is a series of government attempts to regain Japan’s lead in advanced chip production and maintain its dominance as a manufacturer of the materials and tools used in chip production. is the latest in the efforts of manufacturing.
It also reflects a widespread battle across the continent as countries seek to increase their presence in the rapidly evolving technology sector, especially artificial intelligence (AI), and to strengthen control over their supply chains.
An important part of this competition is the exchange rate. All else being equal, a cheaper currency is more likely to attract foreign investment and capital inflows and encourage exports.
Intra-Asian currency movements are extremely important, but from a global perspective, the Japanese yen has depreciated significantly against the dollar so far this year compared to other countries in the region.
Here are the key developments that could give the market more direction on Tuesday:
– US Consumer Confidence (June)
– Canadian CPI Inflation (May)
– ECB, global policymakers converge in Sintra, Portugal
(Written and edited by Jamie McGever)
