Asia Mixed on Taiwan Elections, Ahead of China MLF: Markets Wrap

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(Bloomberg) — Asian stocks are poised for a broadly mixed open in the wake of reinforced bets of Federal Reserve rate cuts and Taiwan’s election at the weekend. China may cut its 1-year medium-term lending facility later today.

Australian shares slipped and equity futures in Japan fell, while contracts for Hong Kong benchmarks pointed to a rise. US stock futures declined during Asian trading after the S&P 500 closed little changed Friday. Prices paid to US producers extended their retreat in December, solidifying bets of a March Fed rate cut. Cash trading of Treasuries are closed due to a US public holiday.

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In Asia, investors will be monitoring Taiwan assets after the Democratic Progressive Party won the presidential election. The People’s Bank of China will also be in the spotlight as it is expected to trim its MLF rate by 10 basis points, breaking a pause stretching back to last August. 

“The motivation to act is strong, in our view: recent data have revealed widening weakness in the economy and growing downside risks,” Bloomberg Intelligence analysts said of the expected cut in a note. “This would be the first leg of 30 basis points of easing we forecast for 2024.”

Read More: Taiwan Election Result to Force Compromise in Boost for Markets

The steady start in Asia comes as a gauge of global equities has gotten off to a rocky start this year after last quarter’s 11% rally — the biggest gain in three years — amid euphoria over AI and bets the global rate hiking cycle is done. 

Elsewhere, Japanese stocks hit their highest since 1990 last week as decades-long deflation fades and a weak yen supports exporter earnings. 

“I look for a pause/pullback from here,” Rick Bensignor, president of Bensignor Investment Strategies and a former strategist at Morgan Stanley, said of Japanese stocks in a note. “But this long overlooked market woke up a year ago, and it continues to be a place you need have money in.”

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Producer Prices Fall

Bond markets have been whipsawed as key inflation and jobs data paints a mixed picture on the US economy. Treasuries rallied on Friday after the US producer price index for final demand fell for a third straight month. Swaps traders see an almost 80% chance of Fed’s easing cycle will start March, up from about 62% earlier last week, according to data compiled by Bloomberg. 

The market is pricing almost 170 basis points in rate cuts this year which “continues to strike us as unreasonably aggressive, especially as the real sector data may show the US economy continued to grow above the 1.8% pace in Q4 23, which the Fed estimates is the non-inflationary speed limit,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The real sector data in the coming days may encourage some paring back of the aggressive wagers.”

Read More: Bond Bulls Fixated on Fed Cuts Risk Getting Smacked Around

After the big fourth-quarter rally, investors are shifting gears to what companies have to show for it in their earnings scorecards. Wall Street’s biggest banks on Friday took turns calling an end to the record run for their biggest source of revenue. Wells Fargo & Co. surprised analysts by predicting a 9% drop in net interest income for 2024, while Citigroup Inc. forecast a modest drop this year. Even JPMorgan Chase & Co., which sees its 2024 haul holding up at 2023 levels, predicts it will drop off over the course of the year. 

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Along with more US earnings reports, investors this week will be focused on inflation readings in Germany and the UK, as well as a swath of political leaders and officials including Chinese Premier Li Qiang attending the annual World Economic Forum at Davos, Switzerland. A speech by Federal Reserve Governor Christopher Waller, after officials last week attempted to temper any expectation of a looming rate cut, will also be closely watched.

“Fed Governor Waller gave an early and strong sign in October that the Fed could stop hiking rates and consider a pivot,” Stephen Gallagher, an economist at Societe General wrote in a note to clients. “We will be watching closely for any pushback on expectations in the financial markets for a March rate cut.”

Oil edged lower after it climbed on Friday as the US and its allies launched airstrikes against Houthi rebels in Yemen.

Some key events in markets this week: 

• World Economic Forum in Davos begins, with this year’s theme “Rebuilding Trust,” Monday
• China medium-term lending facility rate and volume, Monday
• Japan machine tool orders, Monday
• Philippines overseas remittances, Monday
• Eurozone industrial production, Monday
• US markets closed for Martin Luther King Jr. holiday, Monday.
• Iowa Republican caucuses, the first nominating contests for the 2024 US presidential election, Monday
• Japan PPI, Tuesday
• Israel GDP, Tuesday
• Germany CPI, Tuesday
• UK unemployment, Tuesday
• Canada CPI, Tuesday
• Goldman Sachs, Morgan Stanley earnings, Tuesday
• Fed Governor Christopher Waller speaks, Tuesday
• China GDP, Wednesday
• Bank Indonesia rate decision, Wednesday
• Eurozone CPI, Wednesday
• UK CPI, Wednesday
• US retail sales, Wednesday
• Fed issues Beige Book survey, Wednesday
• ECB President Christine Lagarde speaks at Davos, Wednesday
• Australia unemployment, Thursday
• Japan industrial production, Thursday
• Japan CPI, Friday
• Canada retail sales, Friday
• US Congress faces deadline to pass spending agreement before part of federal government shuts down, Friday

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Here are some of the main moves in markets:  

Stocks

• S&P 500 futures fell 0.2% as of 8:50 a.m. Tokyo time
• Hang Seng futures rose 0.2%
• Australia’s S&P/ASX 200 fell 0.2%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0945
• The Japanese yen fell 0.1% to 145.08 per dollar
• The offshore yuan was little changed at 7.1888 per dollar
• The Australian dollar was little changed at $0.6689

Cryptocurrencies

• Bitcoin fell 1.3% to $41,958.93
• Ether was little changed at $2,526.9

Bonds

• The yield on 10-year Treasuries declined three basis points to 3.94%
• Japan’s 10-year yield was unchanged at 0.585%
• Australia’s 10-year yield advanced two basis points to 4.09%

Commodities

• West Texas Intermediate crude fell 0.3% to $72.47 a barrel
• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.

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